A/CONF.191/CP/37

THIRD UNITED NATIONS CONFERENCE ON THELEAST DEVELOPED COUNTRIES

Brussels, 14-20 May 2001

Country presentation

by

THE GOVERNMENT OF BANGLADESH

NOTE

The views expressed in this document are those of the Government concerned. Thedocument is reproduced in the form and language in which it has been received. Thedesignations employed and the presentation of the material do not imply expressionof any opinion whatsoever on the part of the Secretariat of the United Nationsconcerning the legal status of any country, territory, city or area, or its authorities, orconcerning the delimitation of its frontiers or boundaries.

A/CONF.191/CP/37/

i

THIRD UNITED NATIONS CONFERENCEON THE LEAST DEVELOPED COUNTRIES

Brussels, 14-20 May 2001

Presentation of theGovernment of Bangladesh

AACCTTIIOONN PPRROOGGRRAAMMMMEE FFOORR TTHHEE DDEEVVEELLOOPPMMEENNTT OOFFBBAANNGGLLAADDEESSHH,,

22000011--22001100

This report has been prepared under the responsibility of the EconomicRelations Division of the Ministry of Finance, after consultation withmembers of the National Preparatory Committee consisting ofrepresentatives of various Ministries, Chamber of Commerce andIndustries and Civil Society in Bangladesh.

ii

Table of Contents

I. INTRODUCTION 1

II. PERFORMANCE OF BANGLADESH ECONOMY DURING 1990S 2

Economic Growth 2Agricultural Development 2Manufacturing Growth 3Structural Change 3Export Earnings and Import Payments 3Savings and Investment 4Workers’ Remittance 5External Debt 5Human Development 5Population Growth 6Empowerment of Women 6

III. ASSESSMENT OF FACTORS THAT HAVE FACILITATED ORCONSTRAINED DEVELOPMENT 8

Domestic Factors Influencing Development 8

Inflation and Monetary Management 8Fiscal Management 8Domestic Resource Mobilization 8Trade Policy Reform 9Exchange Rate Policy 10Agriculture and Rural Development Strategy 11Food Security 12Power Sector 12Telecommunications Sector 13Industrial Development Strategy 14Environment 15Governance 16Role of NGOs 16Peace and Social Stability 16

External Factors Influencing Development 17

Problems of Market Access 17Official Development Assistance 18Foreign Direct Investment 18Trade Related Technical and Financial Assistance 19Vulnerability to Shocks: Coping with Natural Disaster 19

iii

IV. SUCCESS STORIES 21

Box 4.1 Rural Roads and Markets Improvement: A Success Story 22Box 4.2 The Success of Micro-credit 23Box 4.3 Success in Coping with Disaster 24

V. PROGRAMME OF ACTION 2001-2010 25

Broad Strategies 25

Promoting People-centered Deve lopment 25Strengthening Human Capital Through Access to Basic Social Services 25Pursuing Efficient Market Based Development 25Augmenting Productive Capacities Through Private Initiative 26Fiscal Management and Domestic Resources Mobilization 26Diversification of the Rural Economy 26High Priority for Energy and Infrastructure Development 26Financial Intermediation for Private Sector Development 27Seeking Global Integration through Enhanced Competitiveness 27Regional Cooperation in Developmental Efforts 27Legal and Regulatory Framework for Good Governance 27Strengthening Local Governance: Financial & Administrative Devolution 28Capacity Building for Good Governance 28Integrating Environmental Concerns 28Attracting FDI for accelerating development 28

Growth Target, Investment Profile and Resource Requirement 28

Agenda for Social Action 30

Reducing the Incidence, Depth and Severity of Income-Poverty 30Reducing the Burden of Ill-Health 31Reducing Nutritional Deprivations 32Reducing the Burden of Illiteracy 33Reducing Regional Differentials in Social Indicators 34

Agricultural Development 35

Three pronged strategy 35Intensification of crop agriculture 35Diversification into competitive products 36Development of non-crop agriculture 36

iv

Industrial Development 36

Resolution of the problem of industrial finance 36Proper pacing and sequencing of trade policy reform 37Pursuing competitive exchange rate policy 37Retaining competitiveness of RMG exports beyond 2005 37Skill and technology upgradation in leather product industries 37Realizing the potentials of IT industries 38Supportive measures for small and cottage industries 38

Risk Factors and the Critical Role of International Support 38

v

Glossary

AMS Aggregate Measure of Support

BTTB Bangladesh Telephone and Telegraph Board

CBO Community based Organizations

CHT Chittagong Hill Tracts

DESA Dhaka Electric Supply Authority

DFI Development Finance Institutions

FRB Feeder Road Type B

HDI Human Development Index

HPI Human Poverty Index

MFA Multi-fiber Arrangement

NCB Nationalized Commercial banks

NEMAP National Environment Management Action Plan

NNP National Nutrition Program

PDB Power Development Board

RDP Rural Development Project

REER Real Effective Exchange Rate

SAPTA South Asian Preferential Trading Arrangement

SOE State Owned Enterprises

TCB Trading Corporation of Bangladesh

TFR Total Fertility Rate

VGF Vulnerable Group Feeding

1

I. INTRODUCTION

1.1 Bangladesh faces formidable developmental challenges. When the Programmeof Action was launched in 1990, Bangladesh had a population of 111 million growingat a rate of 2.2 per cent. With a population density of 752 per square kilometer, it wasthe most densely populated country leaving aside a number of city-states. Per capitaGDP of US$ 276 barely distanced Bangladesh from a small number of countries at thevery foot of the income scale. Agriculture accounted for nearly 30 per cent of GDPand provided direct and indirect employment to more than 60 per cent of the laborforce. The share of manufacturing in GDP remained stagnant at around 13 per cent.Yearly GDP growth stalled at around 4 per cent level. Domestic savings rate of 11 percent and investment rate of 17 per cent were low even by regional standard. Inflow ofForeign direct investment was at a miniscule level of less than $10 million a year.Production and export bases remained undiversified rendering the economy highlyvulnerable to natural calamities and external economic shocks.

1.2 Bangladesh's scorecard on social development indicators was also poor. About48 per cent of the population lived on the wrong side of the poverty line. Infantmortality was 92 per thousand births and life expectancy was 56 years. About 20 percent of the population did not have access to safe drinking water and literacy rate was44 per cent amongst males and 26 per cent amongst females. While gross primaryschool enrollment ratio was 76 per cent, primary school completion rate was only 41per cent.

1.3 However, as Bangladesh is poised to embark on the Action Programme for thenext decade, it has a more optimistic benchmark scenario. It is now a lead performeramong the league of LDCs, and, in several counts, may offer some successfulexamples of crisis coping, economic recovery and social mobility. A number of socialand economic changes have occurred in Bangladesh over the years, with considerablesuccesses in some respects, and notable failures in others. These changes have strongimplications for growth, poverty and human development.

1.4 The Programme of Action 1990 attributed the onus of development primarilyon national government and recommended actions in a wide range of areas to beundertaken by the LDCs themselves. However, it was appreciated that factors beyondnational competence often influence the capacity of the government of a country todesign, implement and follow-up a programme of its socio-economic development.Accordingly, the principle of strengthened partnership and shared responsibilities wasaccepted by the international community as the basic tenet of the Programme ofAction for the development of these countries. In line with this spirit, Bangladeshgovernment implemented policy reforms in many areas covered under the Programmeof Action although a full internalization of the goals of the Programme into thedevelopment plans could not be achieved. Unfortunately, these efforts of the nationalgovernment were not matched by adequate external support. In particular, the supportof the international community in terms of ODA flow, technical assistance, marketaccess, FDI etc fell far short of the level envisaged in the Programme of Action 1990.

2

II. PERFORMANCE OF BANGLADESH ECONOMY DURING 1990s

2.1 Economic Growth Bangladesh's growth performance during the 1990s showsconsiderable improvement over the past decade. Growth was particularly pronouncedin the second half of the 1990s. Between 1990-91 and 1994-95, the annual compoundgrowth rate was about 4.7 per cent. During the second half of the decade, GDP growthrate jumped to 5.1 per cent. The trend rate of growth for the whole of 1990s has beenestimated at 4.8 per cent as against 4.4 per cent during the previous decade. The rateof growth of per capita GDP has also been impressive during the 1990s. In addition tothe higher growth rate of overall GDP, this was facilitated by a sharp fall in the rate ofgrowth of population. During the 1980s, population grew at an annual compound rateof 2.2 per cent, and the rate of growth of per capita GDP was recorded at 1.7 per centper anum. In contrast, population growth rate came down to 1.7 per cent during the1990s. In fact, it has been at the level of 1.6 per cent since 1995. Per capita GDP grewat an annual compound rate of 3.3 per cent during the 1990s. The growth performanceof Bangladesh economy during 1990s, particularly during the second half of thedecade in spite of the devastating flood of 1998, has put it amongst the top performerswithin the developing world. However, in terms of the absolute level of per capitaincome, Bangladesh continues to remain at the lower end of the income scale. Percapita income of US$370 compares unfavorably against the South Asian average ofUS$440 and low-income country average of US$410.

2.2 Agricultural Development Crop and horticulture together constitute thedominant component of agricultural sector. In 1999-00, the sub-sector accounted for56 per cent of agricultural value added. During the decade of the 1980s, crop andhorticulture grew at an average annual rate of 2.3 per cent. The sub-sector experiencednegative growth during the first half of 1990s. The growth rate started picking upfrom 1996-97. Between 1995/96-1999-00, the annual compound growth rate wasestimated to be 4.2 per cent. The performance of the sub-sector during the second halfof the 1990s was spectacular given the devastating affect of the prolonged flood of1998. The government ran a very successful programme to support farmers' effort inmaking up the damages caused by the floods through the provision of credit andsupply of critical agricultural inputs such as fertilizer, diesel and seeds, and publicfood distribution. The experience of agricultural growth during the 1990s has broughtto fore an important lesson. While the performance of the sector still depends largelyon the vagaries of nature, the ability of the farmers to respond appropriately to thesituation depends critically on public support measures relating to agricultural finance,availability of critical inputs particularly seed, fertilizer and diesel, output pricesupport and preventing entitlement failure during natural calamities. Amongst thenon-crop agricultural activities, fishery demonstrated most spectacular growth during1990s. The sub-sector remained virtually stagnant during the decade of 1980 with thetrend rate of growth recorded at 2.2 per cent. Consequently, the share of the sub-sectorin GDP declined from 3 per cent in 1980-81 to 2.7 per cent in 1990-91. In contrast,fishery grew at a trend rate of 7.8 per cent during the decade of the 1990s raising theshare of fishery in GDP by more than 1 percentage points. The other two non-cropactivities, namely, forestry and livestock grew at moderate rates during 1990s and theshare of both these sub-sectors in GDP remained stagnant during this period. Thus,agriculture in Bangladesh continues to remain rice centric with paddy productionaccounting for nearly two thirds of value addition in crop sub-sector.

3

2.3 Manufacturing Growth Against a trend rate of growth of 3.1 per cent during1980s, the manufacturing sector achieved an annual compound growth rate of 8.2 percent during the first half of 1990s. However, the growth of manufacturing during thisperiod was narrowly based on a handful of industries, particularly export orientedreadymade garments industry. The sector slowed down during the second half and theannual compound growth rate came down to 5.5 per cent largely due to the prolongedflood of 1998 and the faltering of the export industries due to a variety of exogenousfactors.

2.4 Structural Change A change in the composition of output and employmentaway from the agricultural sector in the direction of manufacturing and service sectorsis often used as a measure of development. In Bangladesh, the share of agriculture inGDP declined from 29.2 per cent in 1990-91 to 25.5 per cent in 1999-00 - a decline of3.7 percent. The fall was compensated by an increase in the share of manufacturingand construction. The contribution of manufacturing increased from 12.9 per cent in1990-91 to 15.4 per cent in 1999-00. However, both the pace of growth ofmanufacturing and the sector's current share in GDP appear rather modest for it tospearhead sustained high growth of the economy. Thus, for example, in Thailand theshare of manufacturing in overall GDP was 22 per cent in 1980 and it rose to 32 percent by 1998.

2.5 Export Earnings and Import Payments During 1980s, Bangladesh's totalexports in current US$ value grew at an annual compound rate of 9.2 per cent. Theannual growth rate was 14.4 per cent in the decade of the 1990s. In fact, Bangladeshexperienced double digit export growth in most of the years during the 1990s.Imports, on the other hand, grew at an annual compound rate of 4.4 per cent and 10.9per cent during 1980s and 1990s respectively. The gap between export and importwidened from -US$1792 million in 1990/91 to -US$2693 million in 1998/99,although the share of export earnings in import payments steadily rose from 31 percent in 1980/81 to 67 per cent in 1999/00. The openness of the economy as measuredby total external trade as a proportion of GDP went up from around 22 percent in1990/91 to nearly 30 per cent in 1999/00 with the share of export in GDP rising from7 per cent to 12 percent during the same period. The structure of export has changedsignificantly over the past two decades. Bangladesh seems to have made the transitionfrom resource-based to process-based exports. In 1980/81, primary commodityconstituted nearly 29 per cent of total exports. In 1990/91, this share came down to17.8 per cent and further down to 8.2 per cent in 1999/00. There has been a shift fromjute-centric to garments-centric export. In 1980-81, raw jute and jute goods togetherconstituted 68 per cent of total exports. Between 1980/81 and 1999/00, export of bothraw jute and jute products declined in absolute terms and their total share came downto only 6 per cent in 1999/00. In contrast, woven and knit garments togetheraccounted for less than 1 per cent of exports in 1980/81. Their combined share inexports rose to nearly 76 per cent in 1999/00. The evidence presented brings out thebasic weakness of Bangladesh's export sector. In spite of the rapid growth in export,particularly of manufactured exports, the export base has remained extremely narrow.In fact, it has become narrower during the 1990s. The observed growth in export hasbeen propelled mainly by growth in the export of garments - both woven and knit.The commodity concentration also led to concentration in the destination of exports.Historically, the major destinations of Bangladesh's export have been USA, EU,

4

Canada, Japan and China. In 1980/81, these regions received about 30.5 per cent ofBangladesh's export. But market concentration accentuated over time and in 1999/00,the same region was the destination for 86.0 per cent of Bangladesh's export. If onelooks behind the export performance of Bangladesh, one finds that the spectaculargrowth of garments industry was triggered by the relocation of their trade inBangladesh by East Asian exporters in an attempt to circumvent binding quotarestrictions in their own country imposed under the Multi-Fiber Arrangement (MFA)particularly for the North American market. This resulted in the direction ofBangladesh's garments export to remain focused towards USA and Canada. The otherfactor that contributed towards the rapid growth of apparels sector particularly ofknitwear in Bangladesh was the zero-tariff access to the EU markets under theGeneralized System of Preference (GSP). Because of these twin benefits of MFA andGSP, 84 per cent of all apparels exports from Bangladesh were directed towardsNorth America and EU markets even in 1999/00. Thus, Bangladesh seems to havefailed to broaden her export market. She was particularly unsuccessful in penetratingthe market in the growing economies of ASEAN and the NIEs. The share of herexport going to this region declined from 5.5 per cent in 1980/81 to 3.8 per cent in1999/00. As would be expected, Bangladesh's exports have failed to climb up thevalue ladder significantly during the past two decades. The readymade garmentsindustry, which has been the prime mover of exports during this period, remainedconcentrated at the relatively lower end of the market segment producing mainly T-shirts, pajamas, ordinary shirts, shorts, caps, women's and children's wear etc.Diversification into higher valued jackets, shirts of complicated designs, and branditems etc has been slow. Similar has been the experience with the export of leathergoods. Jute goods, another important item of manufactured exports lost in unit valuedue to displacement by synthetics and slowing down of world demand. In the case ofprimary commodities such as raw jute, tea, and frozen food, export price indexvirtually stagnated. The overall export price index thus, registered only modest riseduring the past two decades. With the import price index rising by a higher margin,the terms of trade deteriorated during the 1990s. The situation became particularly badin 1998-99 when all major export items of Bangladesh except woven RMG,experienced decline in unit value by a margin of 5-40 per cent. As a result the overallexport price index rose marginally by 0.6 per cent. This was largely the aftermath ofEast Asian financial crisis that led to worldwide fall in commodity prices, and itcontributed significantly to the sharp fall in Bangladesh's export earnings in that year.

2.6 Savings and Investment Investment as a proportion of GDP was 16 per cent in1980-81. During the decade of the 1980s, there was hardly any improvement in theinvestment scenario and investment-GDP ratio stood at 16.9 per cent in 1990-91.However, during the decade of the 1990s, investment picked up significantly reachingnearly 22 per cent of GDP in 1999-00. Almost all of the increased share of investmentcame from private sources. Public investment constituted about 7 per cent of GDP in1980-81. For the last two decades the ratio of public investment to GDP has remainedstagnant at around 7 per cent. On the other hand, private investment as a proportion ofGDP stagnated around 10 per cent through out 1980s but steadily rose to 15.7 per centin 1998-99. In spite of these increases the rate of investment in Bangladesh remainslow by the standard of the low-income countries and also in relation to its needs. Forsustained high levels of growth, Bangladesh requires a investment rate of 25-30 percent. The stagnation of public investment-GDP ratio indicates limitations of thegovernment in mobilizing domestic resources for investment purposes. During 1980s,

5

investment was constrained by paucity of savings as the level of national savingscould finance less than half of the investment level and the gap was met through netcapital inflow. Since 1990-91, however, national savings exceeded investment levels.Domestic savings was 14.6 per cent of GDP while national saving was 19.7 per centof GDP in 1990-91, which exceeded the proportion of investment by nearly 2.8percentage points. This implies that lack of effective demand for investment may havebeen responsible for inadequate investments in recent years. It should be noted,however, that in spite of some improvements registered during the 1990s, the currentdomestic savings rate of less than 18 per cent of GDP remains dismally low byinternational standards.

2.7 Workers’ Remittance Remittance from Bangladeshi workers working abroadhas been an important source of investible resource augmenting national saving.Workers' remittance accounted for about 3.2 per cent of GDP in 1981-82. During thedecade of 1980s, remittance in US$ increased at a trend rate of 6.7 per cent. In 1990-91, the ratio of remittance to GDP reached the level of 3.3 per cent. Between 1990-91and 1995-96, the compound rate of growth in remittance in US$ was nearly 9.8 percent raising the share of remittance in GDP to 3.8 per cent. However, since 1995 thegrowth of remittance slowed down due to volatile international political and economicsituations. Between 1995-96 and 1998-99, the compound rate of growth of remittancewas 3.4 per cent only. As a result, the share of remittance in GDP came down to 3.5per cent in 1998-99.

2.8 External Debt Bangladesh's external debt burden and debt repayment situationeased somewhat during the second half of 1990s. In 1980-81, outstanding externaldebt at yearend was nearly 30.8 per cent of GDP. During the 1980s, debt burden rosesteadily at a trend rate of 10.1 per cent and constituted 54.3 per cent of GDP in 1990-91. The debt-GDP ratio rose further to 57.6 per cent in 1994-95 but thereafter itstarted declining and came down to 41 per cent in 1998-99. The debt burden alsodeclined in absolute terms. Outstanding external debt at yearend came down fromUS$16767 million in 1994-95 to US$14840 million in 1998-99. Debt servicingincreased steadily during the 1980s at a trend rate of nearly 15.3 per cent raising debtservice-export ratio from 12 per cent in 1980-81 to 18.5 per cent in 1990-91. Howeverthe impressive double digit export growth of 1990s helped in bringing down the ratioto 13.5 per cent in 1994-95 and further down to 9 per cent in 1998-99 although inabsolute terms the volume of debt service rose at a trend rate of 5.4 per cent duringthe 1990s.

2.9 Human Development Bangladesh has achieved impressive success in thebroad area of human development. This is reflected in both aggregate and individualmeasures. Thus, the value of human development index (HDI) has increased from just0.234 in 1980 to 0.309 in 1992. The progress has been faster in the nineties: between1992 and 1996/97, the HDI value has increased by 40 percent, rising from 0.309 to0.438, with an implied average increase of 9.3 percent per year. Similar trends followthrough when the incidence of aggregate human deprivations such as the human povertyindex (HPI) is considered. The human poverty index (HPI) focuses on three aspects ofhuman deprivation: deprivation in longevity, deprivation in knowledge, and deprivationin economic provisioning. The results show that the incidence of human poverty hasdeclined from 61.3 percent in 1981-83 to 40.1 percent in 1995-97. The progress wasfaster on human poverty front. The incidence of income-poverty at the national level--as

6

measured by the head-count index of poverty—declined from 52.3 percent in 1983/84 to46.6 percent in 1995/96. As for the second half of the nineties, available data shows thatrural income-poverty has gone down from 47.9 per cent in 1996 to 44.9 per cent in 1999.Individual indicators such as literacy and mortality rates also show considerableimprovement. Thus, infant mortality rate, which stood at 105 per thousand live births in1985/89, declined to 81 in 1997. The rate of improvement was faster in the recent periodas the matched figure dropped to 65 in 1999. Similarly, the adult literacy rate hasincreased from 29 per cent in 1981 to 39 per cent in 1991 as per the PopulationCensus data. The progress was much faster in the nineties, the 1999 estimate being inthe order of 60 per cent. The pace of increase in HDI was the fastest in Bangladeshamong all South Asian countries during 1987-96. Although Bangladesh has achievedconsiderable success in the broad area of human development in terms of rate of change,actual levels remain low in comparison with many other LDCs. The mismatch betweenquantitative and qualitative dimensions within the broad area of human development isalso particularly worrying. This cuts across dimensions of education, health, nutrition,family planning, and women empowerment. There are also significant regionalimbalances in human development between advanced and backward area in both ruraland urban sectors.

2.10 Population Growth Reduction of population growth—the demographictransition from a high-fertility to a low-fertility regime—has been one of the mostoutstanding developmental successes of Bangladesh. The most striking part of thissuccess lies in the fact that it was achieved at a fairly low level of per capita nationalincome. In this very respect, Bangladesh defied the earlier negative predictionsregarding the bleak developmental prospects of the country, predictions that virtuallybordered on neo-Malthusian ideas of high population pressures leading to severeresource depletion and chronic food shortage. The country’s progress in this area isexemplified by one central statistic, namely, total fertility rate (TFR). This indicator,which actually measures the average number of ever born children per woman in thereproductive age group, has registered an impressive decline from 6.3 in 1975 to 3.3in 1999/2000. The extent of success comes through international comparison as well.In 1975, Pakistan for example had a TFR of about 7, which was very similar to that ofBangladesh. After nearly two decades, the matched figure declined to about 5 inPakistan (as of 1997), which was way above the level estimated for Bangladesh. Theaverage TFR for LDC countries considered as a whole also shows much slowerdecline—from about 6.6 to 5—during the same period, again revealing Bangladesh’smatched performance in very favorable light. As a result, natural growth rate ofpopulation in Bangladesh has substantially declined from about 3 per cent in the mid-seventies to 1.6 per cent in the late nineties.

2.11 Empowerment of Women Over the past decade, women's status andopportunities have improved in Bangladesh. The improvement has been brought aboutby increased job opportunities, demographic change, better education, and betterhousehold technologies. These forces have partly liberalized women fromchildbearing, have enhanced their relative productivity outside the home, and haveincreased their voice in household spending decisions. The government has alsoadopted the strategy of mainstreaming women’s development in all sectors. There is aNational Policy for Women’s Advancement and National Action Plan within whichwomen’s development programs are being implemented in different sectors. A majorstep towards social empowerment of women has been the provision of reserved seats

7

for women representatives to be elected by the voters in the Union Parishad, which isthe lowest tier of the local government. A similar provision of direct election ofwomen members in the municipal bodies has also been enacted. The women membersof Union Parishad and municipal bodies elect the women members to the next tier ofthe local government, namely, the Upazilla Parishad. Despite these development,Bangladeshi women still face enormous challenges. Bangladesh has progressed inexpanding primary education for girls. The gender gap in primary education hasnarrowed down considerably. However, the rate of secondary enrollment for girls isstill very low. Although the gender gap in child immunization is negligible, there areimportant gender disadvantages in mortality and morbidity. Maternal health careremains in a precarious state with very high degree of maternal mortality. The femalework force participation rate has increased from about 9 per cent in 1991/92 to 14 percent in 1995/96. However, the extent of participation is still low compared to sub-Saharan Africa. Even in areas where female participation was significantlypronounced, for example micro-credit and ready-made garments industries, there areproblems that remain inadequately addressed. About 75 per cent of the workers in thegarment industries are women. While there have been some improvement in the realwages of the women workers, the non-wage working conditions have not improvedcommensurate with the growth of the sector. Lack of improvement in the non-wageworking conditions has led to increasing health and insecurity problems for theseworkers. Similarly, growing involvement in micro-credit-based enterprises whilehelped increase control of women over income have not led to lower risks of domesticviolence against women. Notwithstanding some considerable progress in thedimension of women’s empowerment, violence against women is on increase,especially over the recent years. The forms of violence range from domestic violence(accounting for 80 per cent of violence-related incidents) to organized assaults,including “acid-throwing”. While this may be reflective in general of deterioratinglaw and order in the country, the gender-based nature of violence is a source of addedconcern over and above the issue of insecurity relating to property rights. Bangladeshis also increasingly exposed to the problems of girl trafficking, cross-border migrationand refugee influx, and child labor with significant gender dimension. Recently, thegovernment has enacted the Women and Children Repression Prevention Act 2000 todeal with these types of crimes.

8

III. ASSESSMENT OF FACTORS THAT HAVE FACILITATED ORCONSTRAINED BANGLADESH’S DEVELOPMENT DURING 1990S

Domestic Factors Influencing Development

3.1 Inflation and Monetary Management Inflation remained subdued during the1990s averaging at around 5.4 per cent, which was nearly half of the rate observedduring 1980s. Food accounts for 64.47 per cent of the value of the consumptionbasket that is used to construct the Consumers' Price Index (CPI). An important factorcontributing to the observed low inflation rate was good agricultural harvest. In theyears when agricultural output was affected by natural calamities such as flood,inflation rate hinged critically on the extent of food import and the efficiency withwhich food was distributed within the economy. Declining international prices ofconsumer goods also contributed to the low rate of inflation. The governmentfollowed a mildly expansionary monetary policy with broad money increasing at atrend rate of 11.7 per cent during 1990s against the trend rate of growth of 19.4 percent during 1980s. A major problem of the monetary sector has been the highincidence of non-performing loans. In 1996, classified loan was 31.1 per cent of thetotal loan portfolio of the banking system in Bangladesh. In 1999, it stood at 38 percent. In the case of nationalized commercial banks (NCBs), the proportion ofclassified loan in 1999 was 44 per cent.

3.2 Fiscal Management Fiscal management during the 1990s had both positiveand negative development over the decade of the 1980s. On the revenue front, therevenue-GDP ratio remained virtually stagnant at around 7 per cent during 1980s. Thetrend rate of revenue growth was estimated to be only about 3 per cent during thedecade. In contrast, revenue-GDP ratio increased from 7.2 per cent in 1990-91 to 8.9per cent in 1999-00. The trend rate of revenue growth for the decade of the 1990s hasbeen estimated at nearly 7 per cent. On the other hand, total expenditure-GDP ratioincreased from 12.7 per cent in 1990-91 to 15.0 per cent in 1999-00, in contrast to amildly declining expenditure-GDP ratio during the 1980s. The trend rate of growth oftotal expenditure was 3.1 per cent during 1980s and 6.6 per cent during 1990s As aresult, overall budget deficit expanded from 5.5 per cent in 1990-91 to 6.1 per cent in1999-00. Current expenditure-GDP ratio showed a rising trend during both thedecades albeit at a lower pace during 1990s. The trend rate of growth in currentexpenditure was 7.8 per cent during 1980s and 6.2 per cent during 1990s. The currentexpenditure-GDP ratio increased from 6.6 per cent in 1990-91 to 7.6 per cent in 1999-00.

3.3 Domestic Resource Mobilization A critical item in domestic resourcemobilization is revenue effort of the government, particularly with regard to taxrevenue earnings. Bangladesh's tax-GDP ratio is one of the lowest in the world. Theratio stood at 5.9 per cent in 1990-91 and rose to 7.1 per cent in 1999-00. Thesefigures are way below the South Asian average of 12.4 per cent and 17.5 per centrecorded for the LDCs. Two factors negatively impacting upon domestic resourcemobilization are the losses incurred by the State Owned Enterprises (SOEs) andincrease in the level of non-performing loans of the Nationalized Commercial Banks(NCBs). Total loss of the loss-making public undertakings as a percentage of GDPincreased from 0.78 per cent in 1990-91 to 1.3 per cent in 1999-00. Increase in non-

9

performing loans of the NCBs was 0.56 per cent of GDP in 1994-95 and 0.08 per centin 1999-00. Combined erosion of savings due to these factors accounted between 1-2per cent of GDP during 1990s. Foreign financing of deficit was around 4.7 per cent ofGDP in 1990-91. In 1999-00, it came down to 2.8 per cent. Consequently, domesticfinancing of deficit registered significant increase. Domestic finance -GDP ratio wasless than 1 per cent in 1990-91, but rose to 3.3 per cent in 1999-00. Apart fromdeclining foreign finance, the other reason behind rising domestic finance wasincreased public expenditure due to flood in 1998-99. The need for increaseddomestic financing was met mostly from increased borrowings from the scheduledbanks. Because of excess reserves lying with the NCBs, these measures did not causemuch crowding out and the share of private sector in total bank credit remained stableat around 72 per cent. With overall money supply growing at a moderate rate, theincreased borrowing did not have much adverse effect on inflation. However, by1999-00, reserve ratio in the banking system came down to minimum statutory levelrendering further borrowing by the government more destabilizing both in terms ofinflation and crowding out of private investment.

3.4 Trade Policy Reforms Bangladesh carried out wide-ranging trade policyreforms during the past two decades. The reforms covered both tariff and non-tariffbarriers. With regard to non-tariff barriers, the focus has been on deregulation ofimport procedure and elimination of quantitative restrictions. In the case of tariffbarriers, the attempt has been to rationalize the tariff structure, reduce the number ofduty slabs, and bring down tariff rates and their dispersion amongst similarcommodities. Bangladesh has come a long way in terms of dismantling its non-tariffbarriers. The system of import license has been virtually eliminated and the ControlList of Banned and Restricted items has been brought down to a minimum. The roleof the state trading body - the Trading Corporation of Bangladesh (TCB) in importand export has been curtailed, and there is now wider participation by the privatesector in import and export trade that were earlier reserved for the TCB. As a leastdeveloped country, Bangladesh has been exempted in the Uruguay Round of agreementsfrom making commitments regarding tariff reduction. However, rationalization of thetariff structure has been one of the key elements of trade policy reforms in Bangladesh.Prior to 1986, the tariff code had 24 tariff slabs, which were not based on easilydiscernible principles for assigning different rates to different products. In a bid torationalize the tariff structure, the number of ad valorem custom duty rates has beenreduced gradually, which stood at 12 in 1993-94, 6 in 1996-97 and 4 in 1999-00.Preferential rates of duties applicable to public sector enterprise were eliminated in 1989.Tariff reform was accelerated significantly in the fiscal year 1992-93 by the compressionof custom duty rates into a range of 7.5-100% for most products accompanied by theremoval of many end user defined distinctions. As a part of the rationalization measures,maximum tariff rate was reduced from a level of 350% in 1991-92 to 50% in 1995-96,42.5% in 1997-98 and then further down to 37.5 per cent in 1999-00. As a result of thesesustained efforts, average nominal protection, including all import duties and protectivetaxes, fell from 89 per cent in 1990-91 to 25 per cent in 1995-96, a drop of 64 percentagepoints. The import-weighted average protection rate fell by 21 percentage points.However, rapid trade liberalization carried out by Bangladesh does not seem to havecontributed to broad based growth of export industries. The observed growth in exporthas been very narrowly based facilitated mainly by MFA and GSP and supported bypro-active export promotion measures of the government. The impact of tradeliberalization on domestic market oriented industries seems to have been mixed. The

10

positive impacts resulted from easier access to imported raw materials while thenegative impacts were due to displacement by competing imports. While import ofpaper facilitated growth of industries using paper as the input, e.g. bidi, books andperiodicals etc, the paper industry itself experienced negative growth throughout1990s due to displacement by competing imports. In the case of silk industry, the pre-weaving silk activities were adversely affected by the large-scale import of silk yarnwhile weaving of silk fabric got a strong stimulus from easier availability of importedyarn. A wide range of small and cottage industries, which are based on importedmetals, chemicals, plastics etc were net beneficiaries. They faced less displacementbecause their products were competitive and catered to an income group whoseconsumption basket is less import-intensive. While adverse impact on inefficientimport substituting industries is not an unexpected outcome of trade liberalizationmeasures, in the case of Bangladesh the displacement by competing imports seems tohave been more substantive due to rapid implementation of the import liberalizationmeasures without prior announcements. Thus, an important shortcoming ofBangladesh’s approach to trade liberalization has been the failure to announce inadvance the timetable of planned changes in the trade policy. Such priorannouncements would have given more time to the local firms to adjust and respondto the ensuing competition from imports. The other major limitation of the past tradeliberalization measure in Bangladesh is that it has not been accompanied bycomplementary reforms in other areas to facilitate adequate supply response to theliberalization measures. Special areas of deficiency were the non-availability and highcost of credit, irregular supply of power and other utilities, deficient transport andcommunication infrastructure, poor and unreliable port facilities, deteriorating lawand order situation, bureaucratic red-tapism and lack of improvements in labor skill.All these factors raised the cost of doing business in Bangladesh rendering theproducts of domestic industries less competitive against imports.

3.5 Exchange Rate Policy To enhance export competitiveness, Bangladesh shiftedfrom a fixed exchange rate regime to a ‘managed’ system of floating exchange rate in1979 under which the nominal exchange rate was allowed to adjust with fluctuations inthe currencies of major trading partners. Since then, frequent depreciation of the nominalexchange rate of Taka was made in small amounts over the years. The adjustment aimedat keeping the real effective exchange rate (REER) unchanged or depreciate itmarginally. Further steps towards liberalizing the exchange rate regime were undertakenduring the 1990s. In October 1993, the government announced its intention to move tocurrent account convertibility. Finally in 1996-97, Bangladesh government accepted theconditions of Article VIII of the IMF by making the Taka fully convertible forinternational current account transactions. Other measures include permission toexporters to retain a part of their foreign exchange earnings, enhanced foreign exchangeentitlements for business and travels, withdrawal of restrictions on non-resident’sportfolio investment, greater flexibility of the authorized foreign exchange dealers withrespect to fixing the selling and buying rates and foreign exchange liquidity etc.Restrictions on the remittances of dividends, royalties, and the repatriation of capitalhave also been lifted. During the same period, other economies of South Asia that areimportant export competitors of Bangladesh also followed a competitive exchange ratepolicy. Taka has been devalued against dollar by about 53% since 1989/90. But otherSouth Asian economies devalued their currency by an even greater extent as a result ofwhich Taka has appreciated vis-à-vis Indian and Pakistani Rupee eroding thecompetitiveness of Bangladeshi exports. To ascertain what impact these reform

11

measures had on export, one needs to look at the trend in the real effective exchange rate(REER). Available evidence suggests that depreciation of REER has been relativelysmall during the decade of the 1990s. The evidence implies that the flexibility ofexchange rate in Bangladesh was restricted by the attempt to safeguard the REER. Tothe extent that the REER deviated from the true equilibrium exchange rate, this approachto exchange rate adjustment may have eroded the competitiveness of Bangladesh'sexports to some extent. One indication of this is the appreciation of taka vis-à-vis thecurrencies of India and Pakistan, who are major competitors of Bangladesh's main exportitems. The evidence also implies that while the pursuit of the market oriented exchangepolicy was generally supportive of export growth, exchange rate adjustment did notprovide the key stimulus to growth of export in Bangladesh. The appreciation of takavis-à-vis Indian rupee also contributed to increased illegal imports from India causingdisplacement of many indigenous products.

3.6 Agriculture and Rural Development Strategy Agriculture continues to occupya dominant position in Bangladesh economy and is likely to remain so during theearly decades of the current century. More than 75 per cent of the population residesin the rural areas and a significant proportion of them live below the poverty line. Nogrowth or poverty alleviation strategy can, therefore, succeed in Bangladesh without ahealthy agricultural sector. During the 1980s, Bangladesh carried out wide rangingreforms in its agricultural development policy by deregulating and liberalizingmarkets and trade in agricultural inputs and outputs and reducing agriculturalsubsidies. Available evidence suggests that the policy reform, on the whole, createdpositive impact on the sector. Reforms in the input market contributed to increasedproduction, prices of irrigation equipment and other inputs declined with no clearevidence of adverse distributional consequences. In spite of these improvements abasic limitation of the agricultural sector in Bangladesh remained in terms of its lackof diversification. Recent studies have indicated that Bangladesh enjoys comparativeadvantage in the production of a wide range of non-rice crops. To achieve the desireddiversification along the line suggested by the comparative advantage, there is needfor a set of critical public support measures. Under donor persuasion and the dictatesof Structural Adjustment Program, Bangladesh has brought down its level of publicsupport to agriculture to an absolute minimum. Recent estimates of the AggregateMeasure of Support (AMS) to agriculture put this at around 1 per cent of agriculturaloutput although the permissible limit of such support under the Agreement onAgriculture of the WTO is 10 per cent. Bangladesh also provides very little of thegreen box and blue box supports which are admissible under WTO regulation as tradenon-distortionary supports. The issue of agricultural development also needs to beposited in the broader context of rural development. Till early 1980s, ruraldevelopment was thought mainly in terms of agricultural development, whichcentered on crop agriculture and the thrust was on the spread of HYV for whichprovision of seed, fertilizer and irrigation was considered most crucial. Initially, thisstrategy stimulated agricultural growth. But growth was not strong enough to make adent on the widespread level of rural poverty. Agricultural growth also began to slowdown gradually with declining trend in factor productivity and consequently ruralpoverty situation started to worsen. In view of this outcome, diversification ofagriculture, raising productivity in non-crop production, increasing cropping intensityand development of non-farm activities appeared as sensible poverty alleviationstrategies. In mid 1980s, government of Bangladesh spelled out its revised RuralDevelopment Strategy, whose focus was on the development of physical

12

infrastructure involving roads, markets, storage facilities, electricity, minor irrigationetc. The expectation was that development of rural physical infrastructure wouldstimulate development and diversification of the rural economy in general and that ofagriculture in particular. The Strategy has since then, provided the framework forconsiderable investment by the government and the funding agencies under a series ofprojects known as Rural Development Projects (RDPs) during the late 1980s and the1990s. There were several RDPs whose main thrust was on the development of ruralroads (particularly FRBs) and markets (Growth Centers). These projects have beengreatly successful in stimulating the rural economy and have earned the status of bestpractices in rural development parlance (Box 4.1).

3.6 Food Security Concerns underlying food security includes those relating to (i)adequate domestic production of food grains, (ii) building up of public stocks to meetproduction short falls, (iii) timely import of food grains to makeup for production andstock shortages, (iii) targeted food distribution to poor and vulnerable householdsparticularly after natural disasters, and (iv) price stabilization. Food grain productionwas adversely affected in 1994-95, 1997-98 and 1998-99. Private import of foodgrains, allowed since 1994, played a positive role in those years in maintaining theprice ceiling at import parity level. The positive experience with private sector import,however, does not eliminate the need for public stocks. Import parity prices may beunacceptably high in years of tight world markets. Export parity may not provide aneffective floor price in years of bumper harvest because of export difficulties arisingout of non-price factors. Public stocks are also needed for targeted distribution duringemergencies. Public procurement of food grains has been less than optimal in therecent past because of a variety of reasons. The foremost of these are budgetaryconstraint and limitations of storage capacity. There are also institutional problemsrelating to slow purchase from and payments to small farmers, infrequent location ofthe procurement centers, and collusion between traders and officials in usurping themargin between market and procurement price. Notwithstanding these problems, theavailability of food grains at national level was reasonably satisfactory during 1990s.Favorable weather coupled with prudent public support contributed to bumper cropsduring the second half of the decade. Private import of food grains eased the supplysituation during years of bad harvest. However, adequate availability of food grain atnational level does not guarantee food security for the poor households due to theirlack of access to food. Distribution of food grain out of public stock has beenadequate in meeting emergency needs after natural disaster. But there is also thechronic problem of food insecurity for nearly half the population living below thepoverty line. Historically, the government attended this concern through programssuch as Food for Works and Vulnerable Group Development that were mostly donorfunded, with food grains supplied by food aid. But there has been a long-term declinein the trend of food aid flows to Bangladesh. Factors contributing to the decliningtrend included increased competition for aid, worsening of the aid climate, Agreementon Agriculture of the WTO de-linking food grain export from food aid, and estimatesof increased availability of food at national level. The declining trend in food aidmeant fewer resources available for targeting poor households

3.7 Power Sector Bangladesh faces serious problems of power shortages. Powergeneration capacity in 1999 was 3681 MW. But average daily generation in 1998-99was 66 per cent i.e. 2400 MW. Average daily demand for electricity during this periodwas 2650 MW, which amounted to a daily load shedding of 250 MW. Accordingly,

13

consumption of electricity per capita in 1999 was only 110 KW, which is less thanone third of per capita electricity consumption in South Asia. Demand for electricitygrew at a rate of 8.5 per cent during the past decade but supply has grown at anaverage rate of 4.8 per cent only. The supply demand gap has thus been wideningover time. The annual load shedding duration was 113 hours in 1991 and 763 hours in1995 and 2870 hours (33 per cent of total operating hours) in 1997-98. The mainreason behind the power shortage is lack of new investment as well as inadequatemaintenance of the existing capacity. Due to lack of maintenance investment there is acontinuous deterioration in the operating efficiency and quality of service. Plantefficiency is estimated at about 30 per cent. Up to 20 per cent of electricity is lost dueto aging transmission lines. There are acute shortage of funds for the maintenance ofthe power infrastructure The financial crisis of the power sector are largely due torampant corruption and serious management deficiencies within parastatal powerorganizations Power Development Board (PDB) and Dhaka Electric Supply Authority(DESA). There are problems of overstaffing and high system loss averaging morethan 30 per cent, and large unpaid dues. The combined net system-loss of PDB andDESA in one year is estimated at US$100 million, which could in itself, provide thenecessary investible fund for at least one 250 MW gas turbine. The outstanding dueon DESA alone is Tk. 2.5 billion. Apart from internal problems of its power system,Bangladesh has also been exposed to a complete disruption in the availability of ODAfor the power sector from its multilateral and bilateral donors because of the slowpace of reform in the sector required under World Bank's Energy Sector Policy Loanof 1989, and also due to changed policy of donors for using FDI for power sector.Demand forecasts suggest that maximum demand would grow from 3150 MW in2000 to 4600 MW in 2005 and to 6780 MW in 2010. Finally, by 2015 maximumdemand would reach 9900 MW. To meet the forecast demand will require investmentof US$4.4 billion in generation and US$2.2 billion in transmission during the currentdecade. The overwhelming need to generate and add around 1200-1500 MW ofelectricity to the present system up to 2002 is inescapable. Given the supply shortagescenario, the government formulated a private power policy in October 1996 with aview to attracting FDI. Agreements were signed within 2 years (1997-99) for three100 MW each floating barges. During the same period, 2 major land based contractswere also signed for supply of power of about 800 MW (combined cycle) capacity by2002. The government has also taken several steps to augment PDB electricitygeneration capacity. The opening of the power generation activities to the privatesector has been a positive development. But pouring more power into the system isnot the only way of coming to grips with problems in this sector. Much more needs tobe done with regard to outdated transmission and distribution lines, load managementand above all huge system, transmission and distribution losses.

3.8 Telecommunications Sector Telecommunications infrastructure constitutesthe backbone of today's information technology. The high rates of return and theextensive social and economic benefit that Bangladesh can derive for wider segmentof the society through the application of information technology critically hinges onher ability to rapidly upgrade the existing telecommunication infrastructure. By worldstandard, the existing telecommunication facility in Bangladesh is a primitive one. In1980 there were 120,000 telephone lines in the country, which increased to 241,190by 1990. By 1999, number of telephone lines increased to 474,322. The currentteledensity of 0.5 telephones for every 100 persons compares very unfavorably with1.5 in India and 2.5 in Pakistan. Digital technology was first introduced in the

14

domestic telephone network in the late 1980s. Currently, 61 per cent of the telephonelines are digital. By 1981, the country had two earth stations for satellitecommunications and more were added during 1990s. These earth stations are muchtoo small for the requirements of data communications. Data communication istherefore done with VSAT connections to satellite, a method that does not give all thebandwidth necessary for large Internet provision. The appropriate provision for high-speed data communication is Optical Fiber Gateway. When the Asian IT Highway -the undersea optical fiber cable in the Bay of Bengal - was laid in early 1990s, thegovernment declined participation. The present government is now looking for a cost-effective way of connecting to the IT Highway through arrangements with SingaporeTelecom for laying a submarine cable between Bangladesh and Singapore. The sectorwas opened up for private investment in 1994. Since then several private investorshave entered into the sector mainly in the area of mobile telephones. There were some128,664 telephones provided by the private sector in 1999-00. Recent important stepstowards the development of the telecommunications sector include enactment ofNational Telecommunications Policy in 1998 (NTP98) and relaxation of controls bythe public body Bangladesh Telegraph and Telephone Board (BTTB). The NTP98 hasthe provision for setting up an independent regulatory BangladeshTelecommunications Regulatory Commission (BRTC).

3.9 Industrial Development Strategy The goal of increasing efficiency andproductivity in the industrial sector by transferring public sector industries to theprivate sector was stated in the Industrial Policy of 1991 and 1999. But the process ofprivatization has been painfully slow during this period. During the first half of 1990s,only 12 enterprises were privatized. During the later half the number of privatizedunits stood at 8 Apart from direct privatization, the government has also off loaded itsshare from 6 multinational and national companies Very recently, the government hashanded over 9 textile mills to the workers, employees and management of theconcerned mills as a new form of privatization. Privatization of 11 other enterprisesand sale of share of 10 other companies are in the final stage of implementation. In anattempt to expedite the process of privatization, the “Privatization Law” was enactedby the government in July 2000. The authority of the Privatization Board has alsobeen elevated to that of a Commission through this measure. However, despite thesemeasures, there were still 125 enterprises in the public sector at the end of 1999-00.The total loss of public sector enterprise in 1999-00 stood at Tk. 4819 million, whichwas nearly 4.3 per cent of industrial GDP in the large-scale manufacturing sector thatyear. Procedural complexities, bureaucratic delays, insufficient number and low levelsof bids, and resistance by labor against possible job loss have been some of the mainreasons behind the slow pace of privatization. The second major obstacle to industrialdevelopment in Bangladesh is problems relating to industrial finance. The publicsector Development Financial Institutions (DFIs) responsible for industrial termlending became virtually non-operational in the late 1980s as aid agencies cut off flowof funds due to huge loan default. During the 1990s, the nationalized commercialbanks (NCBs) stepped into the shoe of the DFIs and ended up with nearly 64 per centshare in the classified loans, which in turn was nearly 31 per cent of the total loanportfolio of the banking system. The difficulties relating to term lending by the NCBshas nearly starved the industrial sector of Bangladesh of institutional credit. Exceptfor some success with leasing companies, development of alternative financinginstitutions, such as investment companies has been slow. Also, growth of the stockmarket and inflow of FDI have not been rapid enough to attend this concern.

15

Although policy reforms removed all restrictions on private investment, industrialdevelopment during 1990s were very narrowly based, as a wide range of structuralconstraints remained unresolved. These include inadequate power, communicationand port facilities, deficient technology, lack of skilled workers, and corruption andred-tapism.

3.10 Environment Bangladesh has so far ratified and acceded to 22 internationalconventions, treaties and protocols related to environment. Amongst these the Agenda21 is the basis to attain sustainable development through policies initiated andcoordinated at the national level. Amongst the various environment related plans andprograms undertaken by the government during 1990s, the major one is the NationalEnvironment Management Action Plan (NEMAP) prepared by the Ministry ofEnvironment and Forest in consultation with people from all walks of life. NEMAP isthe product of a pro-active public consultation process, where the concerned peoplehad the opportunity to define the environmental concerns, priorities and problems, andsuggest solutions. It is a synthesis of perceptions of the government, NGOs and thepeople on environmental issues and actions required to address them. Other importantinitiatives include Forestry Master Plan and National Conservation Strategy. A majorbreakthrough in the environmental problem was achieved with the signing of thelong-term treaty on sharing of Ganges water with India in 1996. Notwithstandingthese efforts, however, environmental problems faced by Bangladesh continue to beacute and diverse. Land, which is the main environmental resource and the source ofincome for vast majority of the population is under severe threat of degradation.Competing demand on land from non-agricultural uses of land has been creatingenvironmental strains. Increased use of biomass for fuel purpose has been deprivingthe soil of valuable nutrient and organic matter. Indiscriminate use of chemicalfertilizers, pesticides and polythene bags has been causing quality of land todeteriorate. Intrusion of sea-water into the main land due to decrease in normal river-flow caused by siltation, low rainfall, diversion of upstream river water, and increasedcoastal shrimp cultivation is raising the salinity of land. Increased salinity has not onlybeen affecting soil fertility but also making the availability of fodder difficult. As aresult the traditional ecological balance has been disrupted. A major victim ofincreased salinity has been the mangrove forest of Sundarbans. There is also the lossof cultivable and non-cultivable land due to riverbank erosion. Bangladesh has aclassified natural forest area of around 6-8 per cent of the total land area, which is farbelow the desired level. Deforestation at the rate of 3-4 per cent a year is affectingtopsoil and causing land erosion. Degradation of land also causes reduction of itscapacity to retain water. The severe arsenic contamination--an emergingenvironmental disaster for some parts of Bangladesh--is thought to be an outcome ofchanging land composition. Excessive water withdrawn to meet increasing demandfor irrigation, household and industrial use is also contributing to this process. Next toland degradation, water pollution is the major environmental hazard facingBangladesh. Disposal of chemical fertilizers, insecticides and industrial effluent intoriver water are leading to severe pollution of the marine environment. Water pollutionaggravated by silting up of bed levels and water logging are causing depletion of fishstocks. Air pollution is also a serious environmental hazard. Energy use, vehicularemissions and industrial production are contributing to air pollution. The most serioushealth risks arise from exposure to suspended particulate matters (SPM).

16

3.11 Governance Attempts to improve the state of governance have beendirected towards reform of the legal framework, strengthening of law enforcementcapacity, enhancing people’s participation in local self-government system, reformingpublic administration institutions and improving the service delivery. Some of therecommendations of the Public Administration Reform Commission are beingimplemented. The permanent Law Commission has been working on identificationand proposing reforms and modernization of laws. Amendments have been broughtabout in a wide range of Acts and Ordinances including the Bank Companies Act,Financial Institution Act, Negotiable Instrument Act, Securities and ExchangeCommission Act etc. Steps are being taken towards establishment of National HumanRights Commission and the office of the Ombudsman. The recommendations of theLocal Government Commission submitted in 1997 are also being implemented.Despite many of these positive government policy initiatives, Bangladesh continues tostruggle to translate the policies into action, i.e. to establish a legal and regulatoryframework that reflects the policies, to find the means to enforce the regulations andto develop an institutional support structure that can facilitate policy implementation.Weak institutions, pervasive corruption and deteriorating law and order situationplague everyday life of ordinary citizens. The persistent poor quality of economicgovernance is indicated by the unsatisfactory quality of services provided by the publicagencies with very low level of client satisfaction. This encompasses the entire range ofpublic economic and social services—from maintenance of roads and electricitygenerating and distributing stations, to telecommunication and public health care. Someof the poor service quality is, in part, attributable to archaic infrastructure and obsoletetechnology, i.e., the hardware aspects of the problem. But, in most part, the fault lieswith the inefficiency of the institutional and human software. Poor incentives, rampantcorruption, lack of regulatory capacity, absence of the “leadership factor” are some ofthe well-known ills of misgovernance. Exposure to greater market competition (or, atleast, contestation), decentralization, broadening of private (including foreign)participation, higher consumer “voice”, overcoming negative trade-unionism, de-politicization of the functioning of public bodies are some of the remedies.

3.12 Role of the NGOs While, attempts to improve the state of governance continues,initiatives undertaken by the non-state sector involving non-governmental organizations(NGOs) and community based organizations (CBOs) have gone a long way insupplementing government programs in addressing poverty. These agencies asalternative delivery mechanism as well as vocal civic institution have played pivotal rolein the field of micro-finance (Box 4.2), non-formal education, health, environmentconservation and disaster-management. In order to provide a regular forum of dialoguebetween the government and NGOs, which would enhance mutual understanding andcooperation, the Government-NGO Consultative Council has been formed withrepresentative from the government, NGOs and the civil society.

3.13 Peace and Social Stability The country’s otherwise remarkable homogeneity interms of language and culture notwithstanding, there has been a growing dissent in caseof ethnic minorities, especially the hill people living in the Chittagong Hill Tracts(CHT). This was partly due to the failure of national integration, which did not allowmuch room for the non-Bengali people in the imagined community of the Bengalination. But, the matter was made worse by the lack of socially sensitive andcompensatory development policies during the most periods of post-Independence years.Attempts were made to deal with the issue of inter-ethnic conflict as a “law and order”

17

problem leading to growing militarization of the conflict itself. The government had tospend a sizable share of the defense budget on peacekeeping operations in CHT; theresponse of shantibahini (the military wing of the dissenting ethnic groups andorganizations) to counter these attempts only reinforced the overall tendency towardsmilitarization. All these processes led to a large number of internally displaced personsand further widened the chasm between the Bengali and the hill-people. In 1997, therehas been a visible breakthrough in the above process, leading to a year-long dialogue andeventual signing up of a Peace Accord between the Jana Sanghati Samity (JSS) therepresentative Hill organization which led the counter-resistance and the Bangladeshgovernment. This was a beginning of a new chapter in inter-ethnic relations. The Accordenvisaged several measures including the return of the over 100,000 refugees that tookshelter in the neighboring states of India during the conflict years, surrender of arms bythe Shantibahini, formation of a regional council by the representatives of the hill peoplewithin a stipulated time-frame. The Accord also stipulated the formation of a LandCommission to resolve the land dispute cases and called for a strategy of acceleratedeconomic and social development as a priority area. The compensatory higher allocationfor the development of hill economy was warranted on the ground of very low level ofinfrastructural and human development in CHT. There has been a considerable progressin inter-ethnic relations since the signing of the Accord. The accord was signed withoutinvolvement of the third party. More than 70,000 refugees returned home after yearsin refugee camps. The Regional Council led by JSS was formed. A new chapteropened up indicating development potentials of the area with rich natural resource base.A number of disturbing moments, however, persist deserving immediate attention. First,many aspects of the Peace Accord are yet to be implemented. For instance, the regionalcouncil has been given very limited financial power and administrative authority. Amore immediate and socially thorny issue pertains to the pathetic pace with which landdispute cases are being resolved. Evidently, mere formation of the Land Commissionwithout backing it up with appropriate authority is doomed to be a failure. Second, forthe success of the peace accord in CHT, a change in the mindset needed. Mutualconfidence building needs to be strengthened as a key factor to the resolution of thevexing land issue and ending political tussle. While the CHT peace accord has been amajor stabilizing development, there has been deterioration in the general law andorder situation fueled by confrontational politics during the whole of 1990s.

External Factors Influencing Development

3.14 Problems of Market Access The Action Programme 1990 provided for“enhanced access for products of LDCs through elimination, where possible, orsubstantial reduction of tariffs and non-tariff barriers”. But in reality, LDCs likeBangladesh benefited only from limited market access provided under theGeneralized System of Preference (GSP) scheme of various countries. Recently, theEuropean Union has agreed to provide broad based quota free and tariff free marketaccess to all exports from LDCS except arms. But other major importers ofBangladesh’s export, namely USA, Canada and Japan are yet to provide such broadbased market access. Recently, the USA has enacted the Trade and Development Act2000 (USTDA), under which 72 countries of the sub-Saharan and Caribbean regionhave been granted duty-free and quota free access to the US apparel market. This islikely to restrict even further Bangladesh’s apparel export to USA. Apart from non-realization of the promise of zero-tariff access, market restrictions arising out of para-

18

tariff and non-tariff barriers, and rules of origin requirements also circumscribedBangladesh’s export growth potentials. As part of the three rounds of tradenegotiations under South Asian Preferential Trading Arrangement (SAPTA), themember countries offered tariff concessions to the exports of other member countries.But persistence para-tariffs and non-tariff barriers have frustrated these attempts toenhance intra-regional trade. For certain categories of RMG exports in whichBangladesh has reached the MFA quota ceiling, quota restrictions put limit to accessin the US market. There are also instances where USA imposed anti-dumping dutyand countervailing duty on certain categories of textile exports from Bangladesh. TheGSP facilities are subject to the rules of origin to ensure that the benefits are confinedto goods manufactured in developing countries and do not accrue to goods originatingin countries other than the developing countries. In the case of apparels, the EU rulesof origin currently require a two-stage conversion, i.e. from yarn to fabric and fabricto RMG and knit-RMG to take place in the beneficiary country. The rules of origin,thus, restrict the scope of Bangladeshi garments manufacturers to avail the GSPfacility since only a small proportion of the fabric used in RMG is of Bangladeshorigin. In recent times, there has been strong revival amongst the developed countriesof the "social concern" driven trade measures. These relate to labor, health andenvironmental standards and threaten restriction on the expansion of Bangladesh'sexport

3.15 Official Development Assistance The decade of the 1990s saw aworsening in the flow of external assistance and utilization levels. During 1980s, totalyearly aid commitment fluctuated between US$1500 million and US$2000 million. In1990-91, it slumped down to US$1370 million in. In fact, yearly aid commitmentremained below the peak level of 1989-90 for all years during 1990s except 1993-94and 1998-99. The situation was worse in terms of disbursement. Yearly disbursementdeclined steadily through most of 1990s and remained below the peak level of 1989-90 in all years. The share of grant in total assistance also fell marginally from 58 percent in 1989-90 to 56 per cent in 1998-99. Disbursement as a proportion ofcommitment varied between 60 and 80 per cent during the last three years of 1990s asagainst 83 per cent in 1989-90. The evidence clearly indicates a downward trend inexternal development assistance contrary to the commitment made under the ActionProgramme 1990. The situation with respect to aid utilization level was alsounsatisfactory. At year closing in 1999-00, accumulated foreign assistance in thepipeline amounted to US$6375 million, which was more than three years' foreignassistance commitment made during this period.

3.16 Foreign Direct Investment Historically, foreign direct investment (FDI) hasbeen insignificant in Bangladesh. During the decade of the 1980s, yearly FDI inflowamounted to less than US$2 million. During the first three years of 1990s, it increasedto the level of US$10-US$20 million. There was a surge in FDI inflow in 1994 whenit rose to US$371 million. In the subsequent two years, FDI was estimated at US$77million and US$136 million respectively. In 1997-98, FDI inflow again shoot up toUS$386 million. Bangladesh has taken various steps towards attracting foreign directinvestment. These include trade and exchange rate liberalization, current accountconvertibility, liberalization of the investment regime, setting up of Export ProcessingZones etc. In fact, Bangladesh has one of the most liberal investment environmentwithin the region. While, both India and Sri Lanka has retained certain approvalprocedure and limit on equity participation for FDI, Bangladesh has waived all prior

19

approval requirement and limits on foreign equity participation and repatriation ofprofit and income. While these measures provided the necessary incentive package,they did not prove sufficient to attract FDI in adequate amount. Bangladesh haslagged way behind other developing countries of Asia in attracting FDI. FDI isguided mainly by the opportunities of high returns and the associated risks. Animportant factor behind higher flow of FDI into India is the large size of domesticmarket that Bangladesh lacks. Most of the FDIs in EPZs in Bangladesh were in laborintensive export industries attracted by low wages. However, the flow of FDIremained confined to EPZs as the advantage of low labor wage was largelyneutralized by the problems relating to infrastructure, bureaucratic red-tapism, andhigh cost of doing business. Recent surge in FDI inflow into Bangladesh wasinfluenced mainly by the opening up of power, telecommunications, gas explorationand other infrastructure and service sectors to private investment - both domestic andforeign. The opportunity of high returns has provided the impetus for significant FDIinflow into these sectors in recent years. However, the dilemma Bangladesh nowfaces is how to generate sufficient foreign exchange earnings to finance remittance ofprofit and income originating from the FDI inflow into the service industries..3.17 Trade Related Technical and Financial Assistance Global initiative throughfinancial and technical assistance to complement the LDC efforts to upgrade theproduction and export capacity is an integral part of the Programme of Action 1990.This is also in accordance with the "Decisions on Measures in Favor of LDCs" andthe Special and Differential Treatment Provisions of the Uruguay Round ofAgreements. Technical and financial assistance are also needed to make the exports ofLDCs compliant with new standard requirements. In the recent past Bangladesh hasreceived a number trade related technical assistance projects and programs of varyingscope and efficacy. But, on the whole, the implementation status of the promisedglobal initiative has been far from satisfactory.

Vulnerability to Shocks

3.18 Coping with Natural Disasters The territory of Bangladesh represents one of themost densely populated active deltas in the world. Some of the mighty rivers (theGanges, the Jamuna, and the Meghna) run through it. Vulnerability to naturaldisasters, with frequent occurrence of floods and cyclones, is a “common” feature inBangladesh. Almost in every year some parts of the country are affected by naturalcalamities. Owing to variation in topography in the eastern and western zone of thecountry some areas are affected by flood while some others are affected by droughteven in the same year. Possibility of severe floods and droughts during the nextdecade, thus, remains as a major risk factor facing the Action Programme 2001-2010.Since independence, Bangladesh has experienced floods of major magnitude in 1974,1984, 1987, 1988, and in 1998, and draughts in 1979, 1981, 1982, and in 1994.Vulnerability to natural disasters has adverse implications for the country’sdevelopment. First, floods and droughts affect food-grain production, which causefluctuations in food availability, employment and prices. Abnormal increases in food-grain prices and non-availability of jobs affect food entitlement of the poor andthereby creates transitional food security problems. The 1974 flood, for instance, wasfollowed by widespread famine in the country due to failures of food entitlements,especially for the agricultural laborers and the landless engaged in rural non-farm

20

activities. Since then, natural calamities, particularly floods, have become a politicallysensitive issue for the government. Second, every major disaster implies severedepletion of capital stock, eroding the basis for subsequent growth. According to oneestimate done in the Planning Commission, the economy-wide effects of the 1998flood were disastrous to the extent that it would take more than two years to restorethe economy to the pre-flood level of capital stock. Third, frequent occurrence offlood breeds systemic risks and uncertainty. It discourages private capital formationand hence, depresses long-term growth in the economy. Fourth, social effects ofnatural disasters have long-term consequence for chronic poverty, which combinedwith environmentally fragile setting, often lead to dislocation and displacement ofpopulation groups, often termed as “environmental refugees”. There has beensignificant change in the approach to natural disaster, especially in respect of disaster-preparedness, disaster-mitigation and disaster coping. The most striking change thathas taken place pertains to the increased resilience capacity of the Bangladesheconomy (Box 3). This may be seen from the contrast drawn between the 1988 andthe 1998 flood. By hydrological data, the 1998 flood was more severe than the 1988flood both in terms of intensity (the flood water stayed up to 60 days in the 1998 floodcompared with the 1988 flood) and geographical coverage (more territories andpopulation were affected by the latter flood). Nevertheless, the macroeconomic andsocial effects of the 1998 flood were much less compared with the 1988 flood.

21

IV. Success Stories

22

Box 4.1Rural Roads & Markets Improvement: A Success Story

Growth center markets are principal centers for assembly, wholesale and retail transactions ofagricultural and non-agricultural goods and services in the rural areas and act as nerve centersfor the rural areas. There are some 2100 such growth center markets in Bangladesh. As ofnow, most of them have deplorable infrastructure situation. Common facilities such as pavedwalkways, interior roads, market yards, sales platforms and covered sheds used by thevendors etc are extremely poor. Supply of clean water, garbage disposal, drainage etc arevirtually non-existent resulting in high levels of spoilage.

These secondary markets are connected with the regional and national arterial road networkand with the headquarters of the lowest tier of the administrative unit called upazila (sub-district) through Feeder Roads Type B (FRBs). About 77 per cent of the FRBs are earthen,which do not provide year-round access to motorized transport Many "all season" FRBs are,again, cut by annual flood. There are weaknesses in road design and construction practicesand almost total absence of maintenance.

Several Rural Development Projects (RDPs) sought to improve the FRBs and the growthcenters during the late 1980s and 1990s. Of these the ace projects are Rural Roads andMarkets Improvement and Maintenance Projects (RRMIMP) 1 & 2 implemented in 14districts of greater Dhaka and northwest region. The second project has an additional physicalcomponent of improving river jetties for easy landing and unloading facility for country boats.

Special features of the two projects included the following: (a) Emphasis on design andconstruction standards. For that purpose a design and supervision consultant was involvedthrough out the project. (b) Emphasis on maintenance through (i) measures to enhance theresource base of the local government and (b) support to existing best practice formaintenance such as the provision of destitute length women assigned with the task ofmaintaining specific length of the road. (c) Training for increasing the managerial andtechnical capacity of government agencies, local governments and local construction industry.The second project had the other distinctive feature of using participatory approach in theselection, design and implementation of various components of the project.

Findings from evaluation studies of the first project showed the following: (a) Volume oftraffic increased significantly in the first year after road development - Motorized (116%),Non motorized (58%), even pedestrian (13%). The only mode that declined in importancewas bullock-cart (-54%). (b) Total cargo transportation went up by 113% in the first year andanother 43% over next five years. Share of motorized vehicle went up from 41% before roaddevelopment to 70% one year after road development. Similar situation happened with thenumber of passengers transported. (c) Transportation charge per ton kilometer came down by70% in the first year. (d) User cost saving on original and generated freight traffic wasestimated by the Project Appraisal Report to be a maximum of Tk. 2 million per year andaccordingly the IRR was estimated to be 22%. Evaluation data showed yearly user cost savingto be nearly Tk. 6 million. (e) Market survey data showed that number of permanent shopswent up by 26%, temporary sellers by 80% and toll revenue by 117%. Spoilage went down by2%. The evidence also suggest positive impact of road development on economicparticipation rate, agricultural diversification, access to institutional services and the level ofpoverty.

23

Box 4.2The Success of Micro-credit

Bangladesh has achieved impressive success in extending micro-credit facility to the assetlesspoor households who were earlier considered “non-bankable” under the traditional collateral-based financial practices. The idea of micro-credit rests on four key ideas. These are the ideasof relative homogeneity , social collateral, individual ownership and access to developmentalknowledge at the grassroots level. First, the poor are organized into relatively homogeneousgroups in terms of initial asset endowments, which helps bonding and bridging, leading tomutual trust, support and networking. Second, while lending in most cases is made to theindividual it is the group as a whole that remains responsible for the repayment of theindividual loans. The cost of individual default is high since non-repayment of any onemember may bar any future loans to the other members of the group. This results in peerscreening, monitoring and pressure to ensure full repayment except under some extraordinarycircumstances such as unexpected income shocks. Third, the system harnesses theentrepreneurial potentials of the poor, rewarding the innovation and risk-taking whilepenalizing inefficiencies. The choice over the loan project entirely lies with the borrower whousually takes decision in consultation with the group. Fourth, the external agency (oranimator) plays an important role in facilitating the development of institutional capability ofthe poor, especially by providing them access to the domain of developmental knowledgetraditionally reserved for the non-poor. The knowledge in this case encompasses informationand training (and mutual sharpening) of diverse nature ranging from training on how to “doorganization”, keep financial accounting, get access to primary and promotive health, andraise the level of social awareness.

There has been a rapid expansion of micro-credit programs over the last two decades. Theprograms are implemented under various institutional arrangements run by non-governmentalorganizations (NGO), community-based organizations (CBO) as well as (increasingly so) bygovernment agencies (GO). The average annual disbursement of loans from these programscurrently stands over taka 5000 crores (about 1 billion US$), far exceeding the scale of totalrural operations of nationalized banks and specialized banking institutions taken together. Onerecent estimate suggests that the aggregate number of borrowers would be about 5 millionborrowers. About 90 per cent of these are poor women. The general repayment performanceis outstanding by any standard: the share of cash recovery as proportion of the total dues isover 90 per cent (it is over 70 per cent even in a flood-affected agriculturally bad year). Thisstands in sharp contrast to the performance of the traditional banking system where the weightof non-performing assets is as high as 45 per cent.

Successive evaluations have found micro-credit programs to be beneficial to their members.The economic effects in terms of broad based growth opportunities (as measured by income,expenditure, asset, employment) generated because of these programs have been rathermodest, however. This is primarily because the average size of loan disbursed under micro-credit is rather modest limiting the possibility of a big-push. These programs have variousnon-credit components as well. Available evaluations tend to suggest that poor members thatget enrolled in such programs receive social awareness training, often packaged with healthand education. The aggregate social effects seem to have been higher than the income or assetgenerating effects. The aggregate effects of micro-credit have been poverty reducing both aspart of enhanced “voice” and increased income/ employment. The poverty and humandevelopment situation could have been much worse in the absence of these programs.

24

Box 4.3Success in Coping with Disaster

Bangladesh has finally come out of the shadow of famine. This is the central message thatemerges from reviewing the overall performance record, not just the government, suggesting aturning point in the societal capacity to deal with disaster events even of the scale of the 1998deluge. This success was not unique, for ever since the famine that struck in 1974, successivegovernments took various steps in developing institutional capability to cope and mitigate disaster(flood, drought, cyclone, epidemic all of which visited Bangladesh every now and then). Sinceindependence, Bangladesh have experienced floods of major magnitude in 1974, 1984, 1987,1988, and in 1998, and draughts in 1979, 1981, 1982, and in 1994.

The 1998 flood in Bangladesh caused a 2.2 million MT shortfall in rice production and threatenedfood security of tens of millions of households. The flood water stayed for 68 days and affected amuch larger area than the earlier major flood of 1988. The flood was viewed by many as theworse disaster that hit Bangladesh in the twentieth century.

What are the salient features of the “handling” of the crisis triggered by the 1998 flood that maylead one to conclude about the enhanced crisis-coping capacity of the Bangladeshi state? First, itis true that despite the best efforts of donors and government, public distribution of rice andwheat was only 188 thousand MTs more than originally planned for July 1998 through April1999. Nonetheless, a major food crisis was averted as private imports, made possible by tradeliberalization in 1994 (allowing private import of food grains), stabilized market prices andsupplies. Second, recent studies have shown that government direct distribution programs such asimmediate relief efforts and medium-term Vulnerable group Feeding (VGF) programme wasfound to be well-targeted to poor areas, and within those, to the poor households. The list of theeconomically most distressed areas was prepared for priority attention. Third, NGOs and civicagencies played a crucial role in the immediate relief efforts, thus supplementing possiblegovernment failure. Fourth , surveillance initiatives at the grassroots level and from belowoperated throughout the difficult months of September-December 1998: civic action committeesuch as Nagorik Durjog Mukabala Uddoyog (NDMU) were formed and functioned, regularlyfeeding the press about the changing situation on the ground. Agencies such as Save the Children(UK) carried out rapid nutritional surveys in the most disaster prone areas. Fifth , while NGOsextended a big helping hand to the government in the midst of crisis, the relationship between thetwo was by no means one-sided. Flood has adversely affected the repayment capacity of the NGOborrowers of micro-credit. As these NGOs mostly operate banking on the revolving loan funds,they themselves were entangled in “liquidity crisis” in finding new sources of credit forsustaining credit operations once the flood water started to recede. Government came forward tohelp the major NGOs under the circumstances offering new loanable funds. This eased theliquidity pressure that built-up around the micro-finance operations of NGOs. Apart from theindirect support, the government also undertook an ambitious programme of disbursing over taka3000 crore (about US$ 600 million) ostensibly to assist mainly the small farmers and share-croppers. Although there has been some leakage to the non-target farmers and traders, the overalleffect of this initiative on the recovery and growth of the rural economy was favorable. Sixth,government was able to avert major public health crisis during the time of disaster. Most of thesuccess was due to higher level of citizen awareness about the basic preventive and promotivehealth measures. Seventh , the presence of active political opposition and free press helped thegovernment indirectly by pin-pointing the weaknesses in the coping mechanism as well asindicating the potential dangers that lay ahead.

25

V. PROGRAMME OF ACTION 2001-2010

Objectives

5.1 The Programme of Action aims to consolidate the gains achieved during theprevious decade and contribute to a significant improvement in the human conditionsin Bangladesh during the present decade. In that pursuit, national policies will revolvearound the following priorities:

• A significant reduction in extreme poverty;• Developing human resources to support long-term development;• Achieving gender equality and empowerment of women;• Removing supply-side constraints to accelerate growth and employment

generation;• Achieving competitiveness of domestic production;• Integrating with the globalized world economy;• Promoting good governance and social stability;• Reducing vulnerability and conserving the environment.

Broad Strategies

Promoting people-centered development5.2 A basic tenet of the poverty reduction strategy will be the pursuit of broad-basedand equitable “pro-poor” growth. An essential element of this strategy will beadequate access of the poor to basic social services, productive resources and decisionmaking so that poor are in a position to benefit from expanding opportunities madeavailable through the process of growth. Mainstreaming the gender perspective in theconception, design and implementation of all development policies and interventionswill be a key instrument in the fight against poverty. Principles of human rights, socialjustice, and democracy will be the accompanying attributes of such a people-centereddevelopment strategy. Also, greater alignment will be sought between nationalpolicies (e.g. five-year plans, PRSP etc) and external assistance strategies ofdevelopment partners.

Strengthening human capital through access to basic social services

5.3 The strategy for human development will involve building on the successachieved during the previous decade by (a) increasing budgetary allocation in favorof social infrastructure and basic social services, (b) encouraging involvement of allstakeholders, including civil society and local communities, in the design,implementation and evaluation measures relating to the provisions of socialinfrastructures and basic social services, (c) paying greater attention to goodgovernance as well as issues of quality and equity in social services across gender,social groups and regions.

Pursuing efficient market based development

5.4 Building on the past efforts and experiences, a distortion free incentive structurewill be put in place through appropriate policy reforms and sound macroeconomic

26

management. Appropriate legal, institutional and supervisory arrangement will be setup to promote the efficiency of the market, counter possible market failures and createsafety nets for the most vulnerable groups of the population.

Augmenting productive capacities through private initiative

5.5 Diversification and growth of the production base will be sought mainly throughprivate initiative. Public undertaking in production activities will be allowed wherepublic sector involvement is essential to facilitate the growth of the private sectorand/or where there are overriding social concerns to be accommodated. The role ofthe government will be to facilitate private sector led development throughappropriate legal, institutional and policy framework and complementary investmentsin institutional, physical and social infrastructure, information generation anddissemination, R&D efforts for acquisition and adaptation of technology, skillformation and market research to identify new trading opportunities conducive toniche product development. Regular and extensive private-public dialogue will be thebasis of the interactive development process. Strengthening national statistical systemwill aim at creating a comprehensive and integrated information base.

Fiscal management and domestic resources mobilization

5.6 Improved fiscal management will be sought through raising the quality of publicexpenditure, enhanced revenue efforts, and containing domestic financing of deficit ata sustainable level. Containing SOE losses through better management andaccelerated divestiture of public sector enterprises, debt recovery, and financial sectorreform will be integral parts of this endeavor. Greater mobilization of domesticresource will be targeted through appropriate incentives to saving, promotion ofmicro-finance, and development of the capital market.

Diversification of the rural economy

5.7 Given that more than 75 per cent of the population resides in the rural areas and asignificant proportion of them live below the poverty line, diversification of the ruraleconomy focusing on development of agriculture, fishery, livestock, rural industryand other non-farm activities through improvements of rural infrastructure, provisionof finance and extension service will be important components of poverty alleviationstrategy. Food security shall receive attention as part of strategy for poverty reductionand response to vulnerability. There is significant scope for replicating on wider scaleBangladesh’s successes of participatory approach based rural infrastructuredevelopment projects.

High priority for energy and infrastructure development

5.8 The opening up of the energy and infrastructure sector for private investment -both private and foreign- has facilitated inflow of considerable foreign investment intothese sectors. Further progress in these area will require (a) restructuring and reformof the relevant parastatal bodies to provide more room and efficient support to theprivate sector, and (b) creating complementary infrastructure facilities such asgeneration, transmission and distribution of power, optic fiber gateway for

27

telecommunications and information technology with external supports. A criticalarea of action in the next decade will have to be the improvement in the physicalfacilities and management of the country's major ports, to facilitate the growth oftrade and commerce.

Financial intermediation for private sector development

5.9 Resolution of the weaknesses of financial intermediation will be targeted for theenhancement of private investment in general and manufacturing growth in particular.The persistent loan default situation continuing from the past has resulted in high costof borrowing and inhibited private investment. Debt recovery with strict enforcementof law, political insulation of the banking system, greater monitoring by the centralbank and reform of the public sector financial institutions, which have already beeninitiated, will be sustained as the overriding agenda for private sector development inthe coming decade. Innovative financial institutions outside of the traditional bankingsystem will be required to cater to the needs of venture capital, and collateral freemicro-finance particularly for small and cottage industries.

Seeking global integration through enhanced competitiveness

5.10 Removing procedural and institutional bottleneck that increase transaction cost,improving standards and quality control, and raising productivity and efficiency atplant level through improved working conditions and better terms of employment willbe the prime basis of augmenting competitiveness. Effective and informedparticipation in multilateral negotiations on trade including better market access,finance, technology transfer and related area will be sought through human andinstitutional capacity building.

Regional cooperation in developmental efforts

5.11 Regional and sub-regional cooperation, particularly in the areas of human andproductive capacity building, health, education, professional training, agriculture,water resources, environment, science and technology, trade and investment, transit-transport cooperation, technical cooperation and exchange of best practices will bedrawn upon to augment developmental efforts. Regional cooperation will also be asteppingstone towards integration with the world economy.

Legal and regulatory framework for good governance

5.12 Efforts to establish an effective, fair and stable institutional, legal and regulatoryframework for the public sector, private sector and civil society while ensuringindependence of executive, legislative and judiciary will form the cornerstone of thedrive towards transparency, accountability, and the prevalence of the rule of law forgood governance. Setting up of National Human Rights Commission and the Office ofthe Ombudsman will be important steps in that direction

28

Strengthening local governance through financial and administrative devolution

5.13 Decentralization through transfer or devolution of authority and financialresources will be necessary to secure effective local governance. Empowerment ofwomen and the local population already initiated will be strengthened.

Capacity building for good governance

5.14 Strengthening human and institutional capacity for the formulation, applicationand evaluation of policies and actions including suitable incentives will be attemptedfor improved governance both at national and local levels.

Integrating environmental concerns

5.15 Environmental components will be included into all development programs andprojects to distinguish, identify and assess the sustainable dimension of the projects.In this context, the National Environment Management Action Plan (NEMAP),Forestry Master Plan, and National Conservation Strategy will provide the overallframework.

Attracting FDI for accelerating development

5.16 Bangladesh has one of the most liberal investment regime in the region, butlagged way behind other developing countries in Asia in attracting FDI. There isurgent need for projecting a positive image of the country to prospective foreigninvestors highlighting measures undertaken for strengthening the legal framework,lowering transaction cost and improving investment climate.

Growth Target, Investment Profile and Resource Requirement

5.17 Bangladesh has been successful in reaching nearly 6 per cent growth rate in late1990s thus breaking the 4 per cent growth barrier that persisted until the early 1990s.Per capita income in Bangladesh, however, still remains much too low. If economicgrowth has to bring about perceptible change in the prevailing poverty andunemployment situation, Bangladesh must raise growth to a sustainable levelapproaching 7-8 per cent over the medium term - i.e. by 2005 and the end of thedecade.

5.18 The growth rate for the first year has been projected at 5.7 per cent based on anoptimistic scenario of the current year’s performance. The average annual compoundgrowth rate has been envisaged to be 7.0 per cent during the first five year of theAction Plan and 8 per cent during the second half.

5.19 Table1 gives the investment profile for the fifth and the terminal year of theAction Plan 2000-01. Based on investment data for 1999-00 and the expected growthrate of 5.7 per cent in the first year the ICVR works out to be 3.93 in 1999-00. Basedon assumptions regarding growth in factor productivity, the estimates of ICVR yieldsprojected investment figures, which shows that that to achieve the target growth,investment in the fifth year will have to be nearly 25 per cent of GDP against the

29

current year investment-GDP ratio of about 22 per cent. The investment ratio-GDPratio reaches 27 per cent in the terminal year.

Table 1Investment Profile for the Decade of 2000

(in 1995-96 prices) (million taka)

Year GDP GDPGrowth (%)

ICVR Investment Investmentas % of GDP

1999-00 2040200 5.5 3.93 457005 22.42000-01 2196491 5.7 3.70 504105 23.32004-05 2861486 7.0 3.50 715372 25.0

2009-2010 4204461 8.0 3.25 1135204 27.0

5.20 Given Bangladesh’s track record with population control, it will be realistic totarget a population growth rate of 1.4 per cent by the year 2005 and 1.0 per cent bythe terminal year of the Action Plan in 2010. This would mean a rate of growth of 5.6per cent in per capita income during the first half of the decade and 7 per cent duringthe second half raising current per capita income from approximately US$370 to US$486 in 2004-05 and to US$682 in the terminal year 2009-10 in 1999-00 prices.

5.21 Resource requirement for financing the investment programme is estimated to beTk. 2875 billion for first five years of the Action Plan and Tk. 4365 billion during thesecond half in constant 1995-96 prices. On the basis of the observed share of 30.03per cent of external resources in plan outlay during the first two years of the FFYP,the target for the share of external resource in investment financing is set at 25 percent during the first half of the decade and 20 per cent during the second half of theAction Plan (Table 2)

Table 2

Resource Requirement and Sources of Finance

2000-05 2005-2010 TotalSourceAmount % Amount % Amount %

Domestic 2156 75 3492 80 5648 78External 719 25 873 20 1592 22

Total 2875 100 4365 100 7240 100

5.22 Domestic saving stood at 17.8 per cent of GDP in 1999-00. The saving rate isenvisaged to rise to at least 22 per cent in the terminal year of the Action Plan toaccommodate domestic financing requirement of investment.

5.23 The external debt burden of Bangladesh is rather low relative to LDCs as agroup, with total debt service at 10 per cent of export of goods and services.Nevertheless, debt relief by bilateral donors will reduce pressure on external reserveand generate more resources for poverty alleviation and development.

30

Agenda for Social Action

Reducing the Incidence, Depth and Severity of Income-Poverty

Challenges

5.24 The very slow progress in income-poverty reduction since the early eightiesstands out as one of the most challenging feature of Bangladesh’s development. Percapita GDP growth has increased from about 2 per cent per annum between the earlyeighties and the early nineties to 3.8 per cent over the last three years. Near doublingof the per capita income growth rate did not result in significant dent on poverty.While the poverty reduction rate improved from 0.4 to 0.8 per cent per year betweenthe same period, it remained far below the desired rate of 2-3 per cent per yearobserved in fast poverty reducing economies.

5.25 Part of the answer lies in the slow rate of economic growth itself, as reflected inthe slow growth of agriculture in the first half of the nineties and sluggish growth ofmanufacturing in the second half of the nineties. The other factor underlying the slowprogress in income-poverty is linked with the sharply rising trend in economic (andnot just income) inequality. Without addressing the issue of economic inequality inBangladesh society, the goal of faster poverty reduction cannot be achieved.

5.26 Even the otherwise modest progress in poverty removal was not uniformthroughout the country. Within urban areas, the poverty rate is higher in non-metropolitan municipality areas compared with metropolitan areas. Within rural areas,some districts and areas had much higher poverty than in other areas. The mostprominent factor of difference seems to be associated with ecological vulnerability (asin the case of river-erosion belts of Kurigram, Jamalpur, and Sirajganj districts).

5.27 There is a widespread feminization of poverty in both rural and urbanBangladesh. But, the issue goes beyond the familiar income poverty rate differentialsbetween female-headed and male-headed households. The more pertinent issue is theheightened vulnerability of poor women even when she is earning better than beforefollowing inclusion in some income earning jobs. Violence against women hasparticularly increased in recent years, directly affecting the freedom and human rightsof women in general and poor women in particular who are more subjected to suchharassment.

Measures

5.28 Poverty can be reduced in different ways. This is because poverty is caused bymany factors. Despite the diverse nature of causes of poverty, one can group them intosome broad policy-relevant categories. Poverty can be influenced via six channels,namely, macro-stability, growth projects, human development, micro-credit-based self-employment, income transfer programs (often known as "safety nets"), and socialmobilization (empowerment at both gender and institutional levels). Appropriate policymix needs to be worked out to achieve the target of eradicating poverty in the shortestpossible time.

31

Targets

5.29 The incidence of extreme poverty is currently assessed at 25 per cent. To achievethe internationally accepted target of reducing extreme poverty by half by the year2015, the incidence of extreme poverty in Bangladesh must be reduced, on average,by about 1 percentage point per year. However, this is not enough from the viewpointof accelerated poverty reduction strategy, which has been declared as the national goalin the Sixth Five year Plan. In order to eradicate extreme poverty by 2015, itsincidence needs to be reduced by about 2 percentage points per year.

5.30 The incidence of overall rural head-count needs to be brought to a level of 35 percent by 2010 (from the 1995/96 level of 51 per cent).

Reducing the Burden of Ill-Health

Challenges

5.31 While there has been some improvement in maternal mortality in the nineties, theoverall progress has been slow. The problem of maternal health (antenatal andneonatal care) demands priority attention. Bangladesh ranks very high in the WorldTable on maternal mortality with estimates varying from 4.8 to 4.4, and furtherimprovement is required to be at par with regional level estimated at 2.4 to 3.5. Amajor factor contributing to such a high rate of maternal mortality in Bangladesh isthe prevalence of childbirth at home, largely outside the purview of the formal systemof health care, with very limited assistance from the trained birth assistants (TBAs).The poor health care for mother also leads to very high incidence of low birth-weightbabies in Bangladesh (exceeding over 50%).

5.32 There has been a reported slippage in the coverage of immunization in recentyears in some areas, leading to partial vaccination, undercoverage, and low efficiency.

5.33 Although the gender gap in mortality has come down, it is still persisting, asreflected in higher male life expectancy over female life expectancy (59.1 vs. 58.6years in 1996), although women have a natural biological propensity to live (aboutfive years) longer than men do. Similarly, infant mortality condition of all irrespectiveresidence, background and gender had improved over the recent years, but theimprovement was least for urban female infants. Hence, a larger gender gap in infantmortality favoring women noted in the early 80s for urban area disappeared largely bymid-1990s. Indeed, by mid-90s the gender gap in infant mortality favoring girls in bothareas had reached a minimal level.

5.34 A special attention needs to be given to reproductive health concerns since theyconstitute an important cause of illnesses of the women of reproductive ages. This causeaccounts for 18 per cent of their acute illnesses, 24 per cent of their repeat illnesses, andas high as 35 per cent of the major illnesses.

5.35 The access of the poorest of the poor to health care services remains a burningissue. The children of the poorest income have double the mortality risk than thosebelonging to households in the top income bracket. The burden of morbidity also fallsdisproportionately on the poorest. The latter (the lowest two income decile groups)

32

spend about 7-10 per cent of their income on meeting private health expenses, whilethey receive only 3 per cent of their income as public health subsidies.

Measures

5.36 The idea of setting up Community Clinics (CC) needs to be supported in order tohave increasing coverage of primary health care services for achieving “Health forAll” by the year 2004. The provisioning of Essential Service Package (ESP) is a stepin right direction. However, the scope and coverage of ESP needs to be increased toinclude not only the reproductive health care and child health care (which is thepresent emphasis), but also curative health services for the poorest and the mostvulnerable. Programme structure provides a useful framework for public interventionin health sector. The private sector will also be encouraged to improve and extendhealth services to rural areas.

5.37 Given the intersectoral impact on health outcomes, improvement in health statuswould be increasingly dependent on possible health consequences of developmentprojects in non-health sectors. Health concerns need to be built into the design andimplementation of non-health projects and programs, ranging from manufacturing totransportation, housing to agriculture.

5.38 There is an urgent need for setting up basic primary health infrastructure (withthe provision for the referrals) in the urban areas especially designed to cater to theservices of the urban poor.

5.39 Given the faster progress in reducing fertility over the last two decades, stepsshould be taken sustain the progressive gains on this score. The apparent slow-downin the TFR over the recent years—as indicated by BDHS data of 1996/97 and1999/00—is a cause of concern. Possible policy slippage on this score must beavoided.Targets

5.40 (a) To bring down the level of infant mortality below 40 deaths per 1000 livebirths by 2005; (b) To reduce maternal mortality to a level of 2.4 per 1000 live birthsby 2005; (c) To increase life expectancy at birth to 66 years by 2005, and (d) Toachieve the demographic goal of net replacement rate (NRR-1) by the year 2003.

Reducing Nutritional Deprivations

Challenges

5.41 Bangladesh is characterized by very high incidence of low birth-weight babies(believed to be about 50 per cent). This is mainly due to the poor nutritional care ofmothers, an area desiring much to be improved. High incidence of low birth-weightbabies is an important determinant of child malnutrition, especially during the firsttwo years. As a result, the incidence of malnourished children still remains very highnotwithstanding some trends of progress in the nineties.

5.42 Considerable gender gap persists in the nutritional status, as documented by therecently released data of the 1999/00 BDHS. The percentage of underweight (below

33

minus two standard deviations, or –2SD, from the reference median) children is about49.8 per cent in case of female child and 45.9 per cent in case of male child under fiveyears. This yields a gender gap of 3.9 percentage points. The female disadvantage innutritional status shows very little variation even if one focuses on the extremedeprivation such as severe underweight (with-3SD). In this case the matched gap turnsout to be 2.7 percentage points. Much of this deprivation is the result of long-termdiscrimination. Thus, the rate of stunting shows that the incidence of severe stunting(with –3SD) is assessed at 19.4 per cent for the under-five girls as opposed to 17.3 percent for the under-five boys. This is reflective of considerable gender-based intra-household inequality in health care and nutritional support, which needs to beaddressed socially and via appropriate empowerment supporting policiesstrengthening status of the women.Measures

5.43 Priority attention must be given to maternal health care and mother’s nutrition toensure better nutritional status of children and hence, protect and enhance productivityof future generations. Since mother’s well being cannot be seen in isolation from theissue of ensuring well-being of women (and girl child) in general, the approach callsfor eliminating all forms of female disadvantages in nutrition, health care andschooling. Caring for women while important in its own right thus becomes also anissue of policy choice, an instrumental means, for promoting economic growth andbroad-based social development. To this end support should be provided to the furtherexpansion of National Nutrition Programme (NNP), which targets pregnant andlactating mothers, and children under 2 years of age. The implementation of NNP inall upazillas of the country by the year 2010 must be viewed as one of the mostimportant social targets.

Targets

5.44 (a) To eradicate acute malnutrition (percentage below –3 SD) among pregnantand lactating mothers and among children under 2 years of age by 2005 and (b) tobring the indicator of “percentage of under-five children underweight” to a level of35 per cent by 2005.

Reducing the Burden of Illiteracy

Challenges

5.45 The aggregate performance assessed on account of HDI or HPI is a quantitativemeasure and hence, says very little about the quality of the indicators that enter intosuch an index. Thus, success in expanding literacy or enrolment at primary level doesnot convey the alarming message of general deterioration in the quality of primary,secondary and higher secondary education in the country. Achievement tests showthat only 8th graders attain the level of knowledge that is supposed to be acquired bythe 5th graders. The recent dismally poor graduation-rate (over 50%) in the secondarycertificate examination shows the very poor quality of schooling. The remedies inimproving the quality lies in allocating more resources to the education budget neededfor improving the school structure, library and lab facility, salary of the teachers, moreteachers, more classrooms, construction of new schools, etc. This is over and abovethe general issue of improving local level school governance. The quality issue

34

applies equally (if not more) to the performance of the ailing health sector, with veryhigh degree of client’s dissatisfaction, poor output, and rising costs.

Measures

5.46 The focus on non-formal education needs to be pursued vigorously. Currently, itis implemented through three delivery modes: (a) center-based NGO programs, (b)district/upazila based Total Literacy Movement (TLM) and (c) centers run byvoluntary organizations. Government needs to continue supporting these programs inorder to sustain and improve basic literacy skills acquired by male and female neo-literates.

5.47 The further expansion of Food-for-Education programs needs to be linked withthe issues of capacity building (both hardware and software). More schools arenecessary in the backward areas where poverty is concentrated. Given the fastexpansion of primary education, the demand for secondary education is expected toincrease at a rapid pace in the near future. This should be taken into consideration inmaking sub-sector allocations within the broad education sector.Targets

5.48 (a) To attain 70 per cent literacy rate by 2002, and 100 per cent by 2007; (b) Tobring all children of age group of 6-10 years under the formal primary educationsystem; (c) To close the remaining gender gap in primary and secondary education,and promote participation of women in every sphere of education; (d) To expandvocational, technical, specialized and professional education and training facilities.

Reducing Regional Differentials in Social Indicators

Challenges

5.49 Superior performance of the social indicators at the average urban level concealssignificant variation by poverty status. In many non-income respects, the situation ofthe urban poor may be worse than their rural counterparts. This is because there is avisible lack of social sector (including safety net) programs targeted to the urban poorand the poorest. For instance, many of the targeted education and health programs arein operation in rural areas but missing in urban areas.

5.50 Human development tends to be specially lagging behind in infrastructurallypoor areas. There is still persisting gap between infrastructurally advanced andbackward areas, within both rural and urban sectors. Of particular importance is thegap observed between the metropolitan and non-metropolitan (municipality) areas, aswell as between large and small towns. Policies and incentive structures should be putin place to encourage decentralized urbanization and empowering local governmentwith adequate investments in social and physical infrastructures of smalleragglomerations.

Measures

5.51 Public policy can play a critically needed equalizing (re-distributive) role in

35

reducing further the observed rural-urban gap in human development. Strategy foraccelerated rural growth and social development must include a combination ofelements of advanced technology (including bio-technology, medical technology, andinformation technology), public investments in physical infrastructures, institutionsfor good governance, and social mobilization of the poor (including the women andthe marginalized social groups and ethnicity). NGOs can play a crucial role in theprocess as catalyser of new development initiatives from below. The rich experienceof Bangladesh in the area of grassroots mobilization through external agencies such asNGOs has been important part of the new development initiatives of the nineties.However, that is not enough to expedite the process initiated so far.

5.52 Spatial dimensions of economic and social well-being would be given dueattention in resource allocations, project selections, and programme implementation.

Targets

5.53 (a) To remove rural-urban disparity in primary and secondary enrollments, basichealth indicators such as infant and child mortality, life expectancy at birth, access tosafe drinking, and sanitation by 2005; (b) To reduce the regional dispersions in theseindicators by prioritizing physical and human investments to the poor areas, withspecial focus on environmentally fragile areas (char and haor areas, river-erosionareas, drought- and flood-prone settings, areas located in hill-tracts and inhabited bymarginalized communities and ethnicities). To this at least 30 per cent of theresources must be earmarked for the development of these areas.

Agricultural Development

Three pronged strategy

5.54 Given the experience of agricultural development in the past, the broad strategyof agricultural development over the next decade will have to be diversification of thesector. This, in turn, would necessitate actions along three lines. First, attempts mustbe made to intensify crop production so as to release resources for other non-cropproductions. Second, Bangladesh has comparative advantage in a number of highvalued crops and attempts need to be made to diversify agriculture into suchcompetitive products. Third, development of non-crop agriculture also needs to bepursued simultaneously.

Intensification of crop agriculture

5.55 Intensification of agriculture through increased yields and higher croppingintensity will require intervention in several areas. By far the most critical inputconstraint is expansion of irrigation and better water management. Production ofimproved quality seed and their timely distribution will also be important in thisrespect. Past experiences have shown the critical role played by research,technological improvements and extension services. With deregulation of fertilizerimport there is now enhanced scope for optimal and balanced fertilizer application. Atthe macro level, conducive policy environment will be needed to provide rightincentives. Public investment in agriculture will have to be augmented to providebroad based infrastructural support.

36

Diversification into competitive products

5.56 Intensification of rice production will release land and other resources, whichmay be put to other use such as cultivation of non-rice crops. There are certaingeographical areas comprising flood free uplands and these may be targeted for thecultivation of vegetables, spices and other non-rice crops. Some of the non-rice cropssuch as pulses, oilseeds, and other fodder crops can be integrated with rice basedfarming system. Crop diversification can also benefit from research on the adoption ofshorter maturity HYVs. For certain categories of non-rice crops such as fruits,vegetables and spices, preservation and quality control, reduction of post-harvest lossand promotion of agri-business and agro-processing may facilitate production andmarketing of those crops. In general, there will be need for greater investment intransport and communication infrastructure and information network to supportmarketing of the perishable non-rice crops.

Development of non-crop agriculture

5.57 Development of non-crop agriculture in Bangladesh has suffered in the past dueto poor quality breeds and deficient management practices. Technological andmarketing factors have also acted as binding constraints to the development of thissub-sector. Provision of finance and veterinary service can greatly facilitatehomestead based subsistence oriented production of livestock. There also existimmense potential of fish cultivation in the flood plains through participatory mode ofdevelopment.

Industrial Development

5.58 The review of the past industrial performance and the analysis of factors thatcontributed to or hindered its growth suggest the following as important elements of astrategy for industrial development during the next decade.

Resolution of the problem of industrial finance

5.59 The discontinuity of operation of the Development Finance Institutions (DFIs) andlack of access to resources for investment on the part of the Nationalized CommercialBanks (NCBs) has severely reduced availability of institutional credit for the industrialsector. The experience of the 1990s has shown that commercial banks in Bangladesh arenot adequate substitutes of the DFIs for meeting the country’s demand for term loanfinancing. A number of investment companies that came into existence to cater to thisneed failed to realize their statutory objective because of their limited capacity tomobilize funds and their choice to operate as quasi-commercial banks. The leasingcompanies have done quite well, but their limited resources and operation fall short ofthe need. The growth of the stock market and the inflow of FDI have also been grosslyinadequate to make up for the short fall in institutional finance. Clearly, there is urgentneed for new institutional initiative to resolve the problem of industrial finance inBangladesh. The new institution will have to generate funds from a wide range ofsources. The main distinguishing feature of the institution will be that it will be run inline with best practice methods of investment financing, which will require competent

37

professional staff devoted to identifying investment opportunities and following themthrough marketing of outputs of supported enterprises.

Proper pacing and sequencing of trade policy reform

5.60 Rapid trade liberalization carried out by Bangladesh does not seem to havecontributed to broad based or rapid growth of export industries. The impact ondomestic market oriented industries has been mixed. Amongst the shortcomings oftrade liberalization in Bangladesh are that the entrepreneurs did not have prior noticeor were not prepared to adjust to the changed policy regime characterized by lowprotection and absence of complementary reforms in other areas to facilitate adequatesupply response to the liberalization measures. Future trade liberalization measures,therefore, should correct for these limitations and be accompanied by adequate stepsdesigned to relax various supply-side bottlenecks.

Pursuing competitive exchange rate policy

5.61 Bangladesh has been following a “managed but flexible” exchange rate policyaimed at keeping the real effective exchange rate (REER) unchanged or depreciate itmarginally. While this has been generally supportive of export growth policy, fasterdevaluation of the currencies of export competing countries has eroded thecompetitiveness of some of her exports and contributed to increased inflow of illegalimports. Restoring and retaining the balance in bilateral exchange rate with exportcompeting countries will, therefore, be an important element of Bangladesh’s exchangerate policy.

Retaining competitiveness of RMG exports beyond 2005

5.62 The concern with competitiveness of Bangladesh’s RMG sector after 2005 has sofar remained confined to efforts towards setting up of backward linkage industries. Butthere is need for careful assessment of the comparative advantage of the differentsegments of backward linkage industries as well as the other factors whichsignificantly erode the competitiveness of Bangladesh’s export – such as skill up-gradation and training arrangements for the workers, better management practices,improved maintenance of machinery, adoption of better technology, better workingconditions, political unrest, frequent power failures, deteriorating law and ordersituation, high dependence of the exporters on intermediaries, delays in portclearance, port congestion, bureaucratic red-tapism etc. The challenges that willemerge after termination of the multi-fiber arrangement (MFA) need to be recognizedand addressed with urgency.

Skill and technology upgradation in leather and leather product industries

5.63 The unrealized potential of leather industry is reflected in the fact that nearly 65per cent of the export earnings of the sector is still due to export of crust leather wherethe extent of value addition is much less compared to finished leather and leatherproducts. Resolution of the skill and technology constraint appears as a sine-qua-nonfor the development of this industry.

38

Realizing the potentials of information and communication technology industries

5.64 Information technology (IT) has been identified as one of the thrust sub-sectorsfor development. Computer software and data entry industry has tremendous prospectfor employment generation and export earning in Bangladesh. In spite of variousmeasures undertaken for its development, IT sector in Bangladesh has remainedminiscule. IT investment has mostly been confined to information processing, whereBangladeshi firms have developed alliance with international firms, mostly fromUSA, for data entry and medical form processing etc. The growth has proven to bepainfully slow mainly because of the poor informatics infrastructure in Bangladesh,which includes high costs of data transmission, poor productivity, lack of trainedprogrammers and management personnel, and poor market promotion by Bangladeshifirms. The following steps are considered essential towards the development of theindustry: (i) improved and decentralized telecommunication facilities, (ii)development of skilled manpower, (iii) provision of finance, (iv) fiscal support, and(v) marketing assistance.

Supportive measures for small and cottage industries

5.65 Past reforms in macro policy framework helped remove a large part of the policybias against small and cottage industries that prevailed earlier. Recent studies confirmthat the reforms did have positive impacts, which are reflected in a fairly rapid growth ofthe sector during the past decade. However, because of their structural weaknesses thesmall and cottage industries may need more pro-active policies for their developmentbeyond the removal of the policy biases. These include increased public investment inthe sector particularly in the area of training, extension, research, market promotion etc.,provision of finance, and preferential fiscal measures.

Risk Factors and the Critical Role of International Support

5.66 The narrow production base of Bangladesh economy renders it highly vulnerable toexogenous shocks. A major threat that is now looming high in the horizon of Bangladesheconomy is the possible displacement of its apparel industry by competing exportersafter the phasing out of MFA in 2005. Currently, apparel export accounts for about 75per cent of Bangladesh’s gross export earnings. The industry employs nearly 2 millionworkers, which constitutes more than 40 per cent of manufacturing employment. Nearly90 per cent of the workers in apparel industry are women which also contributes to theirempowerment, mobility and expansion of individual choices. Under the WTOAgreement on Textiles and Clothing (ATC), the MFA is going to be phased out by 2005.The gradual reduction in the import tariffs on clothing is also going to erode the benefitthat Bangladesh enjoys under GSP facilities. As a result, Bangladesh will face stiffcompetition from countries which until now were restricted because of the quota or thehigh level of import tariff. Bangladesh will be specially disadvantaged in thiscompetition, as it is dependent on imports for more than 80 per cent of its fabric needsfor the apparel industry. The threat of displacement by competing exporters has becomehigher because of the Trade and Development Act 2000 (USTDA) enacted recently bythe USA, under which 72 countries of the sub-Saharan and Caribbean regions have beengranted duty-free and quota-free access to the US apparel market. The growth

39

momentum of Bangladesh in economic as well as social front will suffer serious reversalunless appropriate remedial measures are taken.

5.67 Bangladesh urgently needs international support to be able to withstand suchexogenous shock. In the short run, there is a strong case for providing quota and tarifffree access to Bangladesh’s export by its major trading partners prior to the phasing outof MFA in 2005. In the medium and long run, Bangladesh will need technical andfinancial support to diversify its production base and achieve greater competitiveness byrelaxing various supply-side bottlenecks. Realization of the targets set in the ActionProgramme 2001-2010 hinges critically on the extent to which the internationalcommunity leaves up to its commitment with regard to greater market access, increasedODA support, larger inflow of FDI and enhanced technical assistance.